<PAGE>   1




                                                                      EXHIBIT 13














                    Potash Corporation of Saskatchewan Inc.






                                   [PICTURE]











                                      1997
                                     ANNUAL
                                     REPORT
<PAGE>   2


Phosphate

Nitrogen

Potash

[PICTURE]

3 NUTRIENTS
ONE COMPANY

THREE VITAL NUTRIENTS, ONE VITAL ENTERPRISE

PROFILE

     In 1997, Potash Corporation of Saskatchewan Inc. (PCS) transformed itself
into the world's largest fertilizer enterprise producing the three primary plant
nutrients used by farmers. The largest potash company in the world by capacity,
the second largest nitrogen company and the third largest phosphate producer,
PCS augments its global sales of quality fertilizer products with a wide variety
of valuable non-fertilizer products used in many modern industries.

     A prominent global potash supplier, PCS pulls product from eight mines in
Canada and the United States, and has large quantities of excess capacity on
which it can draw as world demand grows. At its three phosphate facilities in
the United States, it produces the most diversified line of products of any
world producer. It is the world's largest manufacturer of phosphate feed
supplements for livestock and poultry. Its top-quality potash reserves are North
America's largest, and its phosphate reserves will last more than 50 years
operating at full capacity. In nitrogen, PCS has a wealth of upgraded products.
It produces at seven facilities in the United States and has large-scale
operations in Trinidad supplied by favorable long-term gas contracts.

     Through PCS Sales, the Company sells all its products domestically and
handles some of its exports, as well as potash export sales for the largest New
Mexico producer. PCS is an important member of export agencies for potash and
phosphate and owns a full-range retail fertilizer company, Florida Favorite
Fertilizer.

     PCS has 53.9 million shares trading on the Toronto, Montreal and New York
stock exchanges under the symbol POT.


TABLE OF CONTENTS

<TABLE>
<S>                                                             <C>
Your Company                                                    front fold
Highlights                                                               1
Letter to Shareholders                                                   2
PCS Production                                                           6
Potash                                                                   7
Phosphate                                                               10
Nitrogen                                                                14
PCS Sales                                                               18
Stewardship                                                             26
Management's Discussion and
Analysis of Financial Condition and Results of Operations               30
Selected Ten-Year Data                                                  43
Management's Responsibility                                             44
Auditors' Report                                                        44
Consolidated Financial Statements                                       45
Board of Directors                                                      62
Shareholder Information                                                 64
Glossary of Financial Terms                                      back fold
Management and Corporate Information                             back fold
Glossary of Operational Terms                                    back fold
</TABLE>
<PAGE>   3



YOUR COMPANY'S STRATEGY FOR GROWTH


NATURE'S VITAL NUTRIENTS

     Your Company produces the major nutrients nitrogen, phosphorus and
potassium that are essential for growth. It draws potash, the source of
potassium, and phosphate, the source of phosphorus, from the earth where ancient
seas deposited them, and makes ammonia, the base for all nitrogen products, from
air using natural gas and steam. From these natural resources, your Company
produces the fertilizer nutrients that form the basis of its future.

STRIDING FORWARD FROM STRENGTH

     Since becoming a publicly-traded potash company in 1989, PCS has solidified
its position by identifying the business strengths that would enable it to
constantly increase value for its shareholders, and acting on them. Its excess
capacity and its operating strategy of matching potash production to demand to
maximize profitability were identified early as major strengths. 

     While continuing to emphasize the important United States market and supply
it with high-quality potash, PCS recognized the growing export market as the
best prospect for use of its excess capacity, and for higher earnings. It
adopted an acquisition strategy that capitalized on its financial and industry
strengths, confirming it as a leading potash exporter and then building it into
an integrated international supplier of fertilizers, animal feed supplements and
products for industry.

GLOBAL POTASH LEADERSHIP

     In 1990, PCS acquired Saskterra, an offshore-oriented Saskatchewan company
outside of Canpotex, the export sales agency for Saskatchewan potash producers.
Then it arranged to handle offshore sales for New Mexico producers. In 1993, its
purchase of the potash assets of Potash Company of America, including a mine in
New Brunswick on Canada's east coast, improved access to markets in Europe and
Latin America.

PHOSPHATE SYNERGIES ENHANCE DIVERSITY

     Solidly established in potash, in 1995 the Company entered the phosphate
industry by purchasing Texasgulf, North America's premier phosphate producer. It
strengthened its position by acquiring White Springs Agricultural Chemicals in
Florida and blending the two acquisitions. With the benefit of synergies, PCS
followed its strategy to achieve the best margins by producing the products in
its diversified portfolio most in demand by the marketplace.

NITROGEN ADDS VALUE

     In 1997, PCS became the world's largest fertilizer company producing all
three primary nutrients by acquiring Arcadian Corporation, the largest producer
of nitrogen products in the Western Hemisphere. This acquisition broadened the
range of fertilizer products available to its customers and greatly increased
the share of its business devoted to industry.

THE STORY CONTINUES . . .

     The most recent acquisition, Potash Company of Canada Limited (Potacan),
has a mill in New Brunswick ideally situated to give the Company more supply
options. The purchase, completed in the first quarter of 1998, further
strengthened the ability of PCS to meet the demands of its markets.


[GRAPH]

     PCS followed a growth strategy of building on its potash strength to
successfully expand into phosphate and nitrogen, increasing its earnings each
full year since it became publicly traded.


<PAGE>   4






PCS PROPERTIES





[PICTURE]





COVER: Nitrogen, phosphorus and potassium, partners in producing healthy plants
and animals are also partners in PCS. Just as the three nutrients work together
to support plant growth, PCS works with farmers and dealers to help feed the
world.
<PAGE>   5



                                   HIGHLIGHTS

                               FINANCIAL SUMMARY

                     (US$ millions except where specified)


<TABLE>
<CAPTION>
                                                         1997         1996
<S>                                                   <C>           <C>
Net Sales                                              2,325.9      1,403.9
Costs and Expenses                                     1,878.3      1,104.4
Operating Income                                         447.6        299.5
Net Income                                               297.1        209.0
  Per Common Share (Actual Dollars)                       5.68         4.59
  Dividends Per Share (Actual Dollars CDN)                1.44         1.44
Cash Flow from Operations                                467.8        296.2
Long-Term Debt Obligations                             1,130.0        620.0
Shareholders' Equity                                   2,227.9      1,405.5
Return on Shareholders' Equity                           13.3%        14.9%
</TABLE>


All financial data are stated in US dollars.

[GRAPH]

Earnings per share grew at an average compounded rate of 50 percent per year
since 1993.

                            Potash Operating Summary

                          (in thousands of KCl tonnes)


<TABLE>
<CAPTION>
<S>                                                      <C>          <C>
Total Potash Production                                  6,483        5,782
North American Sales                                     3,017        2,589
Offshore Sales                                           3,623        3,023
  Sales to Third Parties                                 6,640        5,612
Sales to Florida Favorite Fertilizer                       129          121
Total Sales Tonnage                                      6,769        5,733
</TABLE>


[GRAPH]

PCS used its cash flow to pay down $300 million of debt in 1997.
<PAGE>   6



                          Phosphate Operating Summary

                            (in thousands of tonnes)


<TABLE>
<S>                                                       <C>       <C>
Total Phosphoric Acid Production (P2O5 tonnes)            2,282     2,096
Sales (product tonnes)
  Rock                                                       29       191
  Solids                                                  1,924     1,880
  Liquids                                                 1,366     1,240
  Animal Feed                                               752       778
  Industrial                                                363       216
</TABLE>


Total P2O5 production and sales reflect the acquisition of the Geismar
operation on March 6, 1997.

[GRAPH]

Net sales were up by 66 percent in 1997, providing record gross margin.

                           Nitrogen Operating Summary

                            (in thousands of tonnes)


<TABLE>
<S>                                                       <C>        <C>
Total Nitrogen Production (N tonnes)                      2,349        -
Sales (product tonnes)
  Manufactured Product
    Ammonia                                               1,061        -
    Urea                                                  1,226        -
    Nitrogen Solutions                                    1,719        -
    Other                                                   894        -
  Purchased Product                                       1,138      535
</TABLE>


The nitrogen production and manufacturing data cover only a partial year, since
the properties were acquired on March 6, 1997.

[GRAPH]

Record potash sales and higher prices helped raise 1997 operating income.


<PAGE>   7




[PICTURE]

C. E. Childers, Chairman, President and Chief Executive Officer

Dear Shareholders

The year 1997 was one of continued growth and transition for your Company. Our
net income and net income per share reached new highs, marking the seventh
consecutive year since we became publicly traded that we improved earnings. In
the past four years, we have posted year-over-year improvements in net income of
104 percent, 75 percent, 31 percent and 42 percent.

     On March 6, 1997, we acquired Arcadian Corporation, the largest nitrogen
producer in the Western Hemisphere, making us the world's largest fertilizer
company producing all three primary nutrients. This continued growth and
evolution required a major reorganization, and operating subsidiaries were
established representing each nutrient.

     The phosphate subsidiary, headed by Tom Wright, is headquartered in
Raleigh, North Carolina and includes the phosphate mine and plant in North
Carolina, the phosphate mine and two plants in Florida, the retail business in
the southeast United States and seven feed phosphate plants strategically
located throughout the United States.

     The nitrogen subsidiary, headed by Gary Carlson, is headquartered in
Memphis, Tennessee. It includes seven plants located throughout the United
States and a large complex in Trinidad.

2


<PAGE>   8



     Our potash subsidiary is headquartered in the corporate headquarters
building in Saskatoon, Saskatchewan, and is headed by Garth Moore. We own and
operate five mines and have production rights in the Esterhazy properties of
IMC, all located in Saskatchewan. We also own and operate potash mines in New
Brunswick and Utah.

     Although each subsidiary President is responsible for the profitability of
his operations, all PCS products are sold by our fourth subsidiary, PCS Sales.
Bill Doyle, its President, is located in Saskatoon, along with the
transportation and distribution group. PCS Sales personnel handling fertilizer,
feed and industrial sales are located, respectively, in Chicago, Illinois;
Raleigh, North Carolina; and Memphis, Tennessee.

     The merging of corporate cultures and procedures, as well as executives,
into our new organization was completed during the year and is working
efficiently.

     Our key corporate executives, Senior Vice Presidents John Gugulyn
(Administration), Barry Humphreys (Finance), John Hampton (Legal), Wayne
Brownlee (Business Development) and Betty-Ann Heggie (Corporate Relations),
along with Peter Braun (Vice President - Audit), have all held their current
responsibilities since privatization. They provide an experienced corporate team
who have grown with PCS during this past eight years as they led its growth. The
goal of PCS management has been and continues to be to provide increasing value
to our shareholders.

     Our excess potash production capacity, held in abeyance for increased
demand, proved to be a prime factor in our 1997 financial results. Strong
markets, both in North America and overseas, resulted in a record year for
potash. A 23-percent increase in domestic volumes over 1996 (exclusive of sales
to another producer) along with a 13-percent increase in price, coupled with a
20-percent increase in export sales volumes, provided a 25-percent increase in
net sales revenues and a 35-percent improvement in gross margin over 1996.
Provincial mining and other taxes of $70 million cut into profits, but we
nevertheless increased our operating income in potash by 26 percent over 1996.


[CHART]

The Company's ability to easily bring on its excess capacity improved potash
gross margin as a percentage of sales.


[CHART]

The PCS nutrients worked together in 1997 for a near-record first quarter, an
outstanding second quarter reflecting an exceptional spring fertilizer season,
strong industrial sales in the third quarter, and record fourth-quarter potash
sales. 

                                                                            3


<PAGE>   9



     The phosphate business had results very similar to those of 1996.
Fertilizer earnings were down due to reduced netbacks in the DAP market. We
increased production of liquid products by 10 percent, as those prices were
better than in 1996, but this could not offset the lower prices for solid
phosphate fertilizers. Increased costs at our North Carolina operation due to
mining problems and downtime at one of the sulphuric acid plants were offset by
reduced costs at the Florida operation.

     The non-fertilizer phosphate business provided increased margins. Although
this represented only 33 percent of phosphate net sales, it provided 47 percent
of the gross margin. Increased prices in the feed business more than made up for
a 3-percent decrease in sales volumes.

     The most significant reason for improved financials for PCS in 1997 was the
addition of the nitrogen business. Net sales of $868 million provided $133
million in gross margin. Our second quarter results were very good but margins
were increasingly under pressure as the year went along. As in phosphate, our
non-fertilizer nitrogen business was an important part of this acquisition. With
34 percent of nitrogen net sales, it provided 51 percent of gross margin.

     In total, PCS had net sales of $2,326 million, an increase of 66 percent,
gross margin of $585 million (up 52 percent), operating income of $448 million
(up 49 percent), net income of $297 million (up 42 percent), and earnings per
share of $5.68 (up 24 percent). Fertilizer products made up 72 percent of net
sales and non-fertilizer products 28 percent. Gross margin was split 68
percent/32 percent fertilizer/non-fertilizer.

     The capital structure of PCS changed as the year progressed. We ended 1996
with a debt of $622 million and a debt to capital ratio of 30.7 percent. After
the Arcadian acquisition, our debt was $1,506 million and debt to capital ratio
was 42.7 percent. We ended 1997 with total debt of $1,235 million and a ratio of
35.7 percent. In June we sold our first bonds, a ten-year issue of $400 million
at a coupon rate of 7.125 percent. The issue was oversubscribed and considered
very successful. We maintain a BBB credit rating.


[CHART]

Flexibility in product selection and choice of markets benefited PCS sales
volumes and gross margin throughout 1997. Its balanced product portfolio will
enhance its position going forward.

4
<PAGE>   10




     Cash flow continues to be a PCS trademark. Operating activities provided
$468 million cash in 1997. Without changes in working capital, the amount was
$503 million.

     Strong reserves and low-cost, efficient operations are other PCS strengths.
Several safety milestones were reached during the year, including the
prestigious John T. Ryan award for the safest mine in Canada being presented to
our Rocanville potash mine for the second straight year. Employees at Aurora,
White Springs and New Brunswick reached 2,000,000 hours without a lost-time
injury.

     However, the year was not without some disappointment. The anticipated
acquisition of the German potash company, Kali und Salz, the agreement for which
was announced in December of 1996, was denied by the German Minister of
Economics in July 1997. That acquisition, which had been worked on for more than
two years, would have provided continued growth for PCS . But even without Kali
und Salz, we have set an enviable record of growth. We are firmly established as
the world's largest fertilizer company producing all three primary nutrients and
our production is balanced among the three nutrients. We have a strong
non-fertilizer segment, utilizing products made from our fertilizer resources.

     With a strong, experienced management team led by an equally strong,
experienced Board of Directors, we do not intend to rest on our accomplishments.
We have in excess of five million tonnes of low-cost Saskatchewan potash
production capacity which we intend to produce and sell as the market grows. We
have completed the purchase of Potacan, another potash producer in New
Brunswick. Although the mine is flooded, the assets include a 1.3-million tonne
mill and excellent storage, loading and shipping facilities. This asset provides
several options for increasing our potash business out of the east coast of
Canada.

     Although the nitrogen business is going through a period of low margins,
the new plant in Trinidad will provide low-cost ammonia with a gas contract tied
to ammonia prices, and further solidify our position in nitrogen. When the new
plant is operating, nearly 45 percent of our ammonia production will be tied to
such gas contracts. The high-cost operation at Wilmington, North Carolina will
cease production in 1998, with replacement production coming from more efficient
plants.

     Your management will continue to strive to improve the value of your PCS
ownership. Our managers will continue to look for synergies among our plants as
well as improvements in costs and efficiency at each operation. Our sales
subsidiary will continue to look for innovative marketing and new ways to
increase our margins. As always, we will search for accretive acquisitions.

Yours truly,


[SIG]
C. E. Childers

Chairman, President and Chief Executive Officer

March 3, 1998

                                                                            5
<PAGE>   11




[PICTURE]


From modern plants in the Western Hemisphere, PCS produced and sold 17 million
tonnes of potash, phosphate and nitrogen to customers worldwide.


<PAGE>   12




                                                                      PCS POTASH

                                   [PICTURE]


SUPPLIER TO THE WORLD

     Potassium, a vital nutrient for plants and animals, raises crop yields and
food value in plants, builds resistance to disease and environmental stresses,
and improves shipping, handling and storage qualities. Animals need potassium
for maintenance, growth and milk production. Potash is the major source of
potassium.

     PCS draws product from seven potash mines in Canada, six of which it owns
and operates, and one wholly-owned mine in the United States. It has 23 percent
of world capacity and an estimated 52 percent of excess capacity, so it can
increase production as markets grow and further reduce its costs per tonne. Its
reserves, which will last more than 100 years, will maintain it as a leader of
the world potash industry far into the future. It consistently makes more than
half its sales offshore, and is a primary supplier to developing nations, where
demand for potash continues to grow.

     In a world in which only seven countries have significant quantities of
potash and more than 150 countries use it, there is a large international trade.
About three-quarters of world production moves across borders. Canada is the
largest producer, followed by Germany and the Former Soviet Union countries of
Russia and Belarus. The United States, the leading consumer, imports 85 percent
of its potash. China, Brazil and India are the leading offshore consumers.
Developing nations, with little or no indigenous potash, account for
approximately 45 percent of world consumption.

     From deep underground, potash is brought to the surface for processing in
on-site mills. Important factors in varying production costs around the world
are thickness, consistency and continuity of the ore; its depth, geological
conditions and K2O grade; mill recovery achievable; operational capacity and
degree of automation. PCS pulls the majority of its product from mines in
Saskatchewan, where the flat beds put all mines in the lowest cost quartile on a
cash-cost basis.

     In the first quarter of 1998, PCS purchased Potash Company of Canada
Limited (Potacan), which has a mill and a flooded mine in New Brunswick. The
Company will use the mill initially to upgrade standard grade potash from
Saskatchewan to granular product for markets in Eastern Canada and the United
States. It will investigate additional future opportunities for the facility,
such as increasing ore production at its original New Brunswick mine to be
processed at the new mill.


[GRAPH]

Source: Fertecon, NRC, PCS


With world demand up by 14 percent in 1997 and the closure of two North
American potash mines, PCS increased production to 53 percent of capacity, up
from 47 percent in 1996.

                                                                            7
<PAGE>   13



[PICTURE]

This electrostatic precipitator removes dust from the dryer exhaust at
Rocanville, helping the operation fulfil its responsibility to protect the
environment.


     PCS produces two dozen grades of potash fertilizer to suit different
markets. Agricultural product is guaranteed to have a minimum of 60 percent K2O
(95 percent KCl) when it leaves a mine site. Potash has industrial uses in
soaps, perfumes, TV and computer screens, and in the oil and gas industry. PCS
produces and markets a potassium-based water softening product, Softouch, and an
ice melt. Its New Brunswick and Utah mines produce sodium chloride (salt), used
for de-icing winter roads and manufactured into various products.

RECORD POTASH PRODUCTION

     With strong domestic and offshore demand and markets tightened by the
closure of two North American mines, PCS set a new production record in 1997. It
produced 6.483 million tonnes, 6.8 percent more than the record set in 1995 and
12 percent more than in 1996. This represented 16 percent of total world
production. Costs on a per-tonne basis were down due to higher production.

     New Brunswick and Moab produced 0.926 million tonnes of sodium chloride.

     Productivity records were set at Lanigan, Allan and New Brunswick.

     Numerous production records were broken in 1997, including daily, weekly
and monthly records for white product at Cory. Lanigan set a record for annual
production, for ore hoisted and milled and for the hourly feed rate through its
mill. New Brunswick set annual production records for potash and salt.

     One of the dredges at Patience Lake, a solution mine, was successfully
automated, raising productivity. Modified hoisting systems installed at
Rocanville and Allan improved reliability and maintenance costs. The new
computerized control system for the crystallizer circuit enhanced efficiency and
recovery at Allan. Cory's miner automation project continued to progress, and
plant throughput and efficiency were increased. First phase modifications to the
crystallizer circuit at New Brunswick will result in significant annual fuel
savings, and installation of a crusher in the compaction circuit increased
granular production.

     PCS reserves at Esterhazy are mined by International Minerals and Chemical
(Canada) Global Limited under a long-term mining and processing agreement
effective through 2026. Every

1997 Production


<TABLE>
<CAPTION>

                           ANNUAL                1997                  1996             MINE SITE
                          CAPACITY            PRODUCTION            PRODUCTION          EMPLOYEES
<S>                <C>                   <C>                    <C>                     <C>
                    (million tonnes KCl)  (million tonnes KCl)  (million tonnes KCl)    (active)

Lanigan, SK                3.828                 1.600                 1.251                324
Rocanville,SK              2.295                 1.692                 1.502                312
Allan, SK                  1.885                 1.011                  .892                266
Cory, SK                   1.361                  .626                  .625                145
Patience Lake, SK          1.033                  .277                  .294                 76
Esterhazy, SK1              .951                  .498                  .442                  2
New Brunswick, NB           .770                  .715                  .702                334
Moab, UT                    .080                  .064                  .074                 51
Total                     12.203                 6.483                 5.782              1,510
</TABLE>

1  Production at Esterhazy is mined from PCS reserves by International Minerals
and Chemical (Canada) Global Limited under a long-term agreement.


8
<PAGE>   14




five years, PCS has the option of terminating this agreement; the next
opportunity is June 30, 2001. Under the agreement, the Company can take between
0.45 million and 0.95 million tonnes of product per year from IMC, and it has
served notice that it will increase its allocation to 0.635 million tonnes,
effective July 1, 1998.

LEADING IN SAFETY

     New safety records were set throughout the potash divisions in 1997,
reflecting the emphasis PCS puts on this area.

     In 1997, for the second straight year, Rocanville received a national John
T. Ryan award; it was the safest mine in Canada in 1996 in the select mining
category. On February 4, 1998, the division reached seven years without a
lost-time injury. Lanigan received its fifth John T. Ryan award for notable
achievement in safe mining in 1996, and marked two years without a lost-time
accident on August 1. Allan reached three years on October 19. New Brunswick
recorded three years without a lost-time accident on June 8. It received awards
from the New Brunswick Mining Association for the lowest frequency and severity
of lost-time accidents of all mines in the province in 1996. Patience Lake
worked four years without a lost-time accident as of September 3, 1997, and Cory
two years on January 2, 1998. Moab completed three years without a lost-time
injury on February 7, 1998.

     PCS teams again excelled at the 1997 Saskatchewan mine rescue competition,
with Lanigan winning for the fourth time. Allan, the 1996 winner, was runner-up
among underground mines. Rocanville won the 17th annual PCS Fireman's Rodeo;
Allan was runner-up. All PCS mines and fire departments in three nearby
communities competed in six rodeo events that demand a range of firefighting
skills.

TECHNOLOGY SUPPORTS PRODUCTION

     Several new potash products were developed to meet the needs of PCS
customers with specific requirements for size, shape, durability, purity or
nutrient composition.

     New process instrumentation for the control of potash mills was introduced,
including grade and brine saturation.

     Mineral separations technologies for improved recovery of potash were
demonstrated at operations, as well as isolation of waste streams for
environmental management.

                                   [PICTURE]

PCS leads the potash industry in mining automation, and Rocanville is the
trailblazer in this area.

<PAGE>   15



                                 PCS PHOSPHATE [PICTURE]

A DIVERSITY OF QUALITY PRODUCTS

Underground phosphate deposits are the source of phosphorus, the energizer of
plant production, which is required for photosynthesis, energy transfer and
reproduction, and assists other yield-developing processes. Animals need
phosphorus for general nutrition and normal body growth, maintenance and
repair.

     About 60 countries produce phosphate products, and PCS is the world's third
largest producer. It has 9 percent of world production and 7 percent of capacity
at its efficient facilities in North Carolina, northern Florida and Louisiana.
The most flexible of the major phosphate companies, PCS can switch its
production among fertilizers, animal feed supplements and products used in
industry, to maximize margins.

     The PCS complex at Aurora, North Carolina has traditionally been recognized
by outside experts as the lowest-cost producer of phosphoric acid, the feedstock
for its other phosphate products. Synergies and efficiencies at the complex at
White Springs, Florida, following its integration with Aurora, brought its costs
down so that the phosphoric acid from White Springs' Swift Creek plant now
rivals Aurora's in cost. Together the two facilities cement the PCS position as
the industry's lowest-cost P2O5 producer.

     Phosphate production facilities are part of the Company's nitrogen
operations at Geismar, Louisiana, producing superphosphoric acid and phosphate
solutions. Its superphosphoric acid production, combined with that of Aurora and
White Springs, confirmed PCS as the world's leading supplier of this fertilizer
intermediary geared to the conservation tillage systems increasingly popular in
the United States.

     The PCS high-quality phosphate ore reserves will last more than 50 years
operating at full capacity. Multi-year permits allow the Company to draw on
those reserves in both North Carolina and Florida, giving it an advantage over
producers whose costs are expected to increase as they spend more on rock.

     Important factors in varying phosphate production costs around the world
include thickness, consistency and continuity of the ore, its depth, geological
conditions and concentration ratio (material removed to obtain a tonne of
phosphate rock). Aurora benefits from high P2O5 content in its ore, from high
tonnage of recovered rock per acre and from a lower concentration ratio. It does
not require clay pond impoundment areas because it blends its byproduct gypsum,
clays and sand into a unique neutralized soil which facilitates and accelerates
land reclamation. Both Aurora and White Springs are convenient to tidewater,
which benefits transportation costs.

     After sand and clay are separated from the phosphate ore, the resulting
phosphate rock is reacted with sulphuric acid to produce phosphoric


1997 PROFILE OF PCS PRODUCTS


                 POTASH             PHOSPHATE              NITROGEN

                 [GRAPH]             [GRAPH]               [GRAPH]


PCS has balanced production among its three nutrients, with a strong
non-fertilizer segment that utilizes products made from its fertilizer
resources.


10
<PAGE>   16



acid (P2O5). From that acid, PCS produces phosphate fertilizers, both solid and
liquid, industrial phosphoric acid used in food and beverage products and
industrial applications, and feed supplements for livestock and poultry. It is
the world's largest manufacturer of such phosphate feed supplements, producing
at seven plants strategically positioned throughout the United States so that
most customers are no more than 200 miles from their next shipment.

     DAP (diammonium phosphate, 46 percent P2O5) is the major solid fertilizer,
an important domestic and export product which is applied directly or in
fertilizer blends.

     The major liquid products, SPA (superphosphoric acid, 70 percent P2O5) and
MGA (merchant grade acid, 54 percent P2O5), are the feedstock for various liquid
and solid fertilizers, phosphate feed supplements and industrial quality acid.

     SPA and MGA are commonly mixed with other nutrients to produce liquid
fertilizers with varying concentrations of P2O5 for the domestic market. LoMag
SPA (70 percent P2O5) is aimed specifically at the growing minimum till market,
and PCS produces nearly half the US supply. Black SPA is sold in North America
to dealers seeking economical suspension liquid fertilizers.

     PCS now uses most of its black SPA in its feed plants to produce the animal
feed supplements Dical (dicalcium phosphate, 18.5 percent phosphorus) and
Monocal (monocalcium phosphate, 21 percent phosphorus). DFP or defluorinated
phosphate (tricalcium phosphate, 18 percent phosphorus) is produced by calcining
a mixture of phosphate rock, MGA and soda ash or caustic soda. Dical and Monocal
are used primarily for swine and cattle, DFP for poultry.

     In a joint venture at its Aurora plant, PCS produces industrial phosphoric
acid. This purified acid is used by soft drink companies to put the tang in soft
drinks, and by metal treating companies to put the shine on shower doors. It is
used in food products, institutional and industrial detergents, production of
activated carbon for emission controls and water treatment, and many more areas.

     World trade in phosphate products represents about one-third of total
production; much phosphoric acid is converted into finished products in the
country of origin and the products are mainly used there. The United States is
by far the biggest phosphate exporter, providing about 70 percent of world DAP
trade. Morocco and Tunisia are the largest MGA exporters, accounting for about
60 percent of liquid trade.


[PICTURE]

The phosphate ore at Aurora lends itself well to production of high-quality
liquids in demand in domestic and offshore markets.
<PAGE>   17




[PICTURE]

The size and quality of its phosphate ore reserves give PCS a competitive
advantage over other North American producers.


     More than 150 countries use phosphate fertilizers, and developing nations
account for approximately 65 percent of phosphate consumption. China is the
largest overall importer of phosphate products and by far the largest DAP
importer, followed typically by India and Pakistan. India is the major importer
of MGA, with Brazil a distant second.

FLEXIBLE PHOSPHATE PRODUCTION

     PCS phosphoric acid production in 1997 totalled 2.282 million P2O5 tonnes,
9 percent more than in 1996. Most of the increase is due to phosphate production
at the Geismar, Louisiana facility which was part of the Arcadian acquisition.
PCS Aurora produced phosphate rock at 80 percent of rated capacity and P2O5 at
101 percent. White Springs produced rock at 100 percent of capacity, and P2O5 at
88 percent. Rock is produced at White Springs' Swift Creek mine and processed at
the Suwannee River and Swift Creek facilities. Geismar uses imported rock.

     White Springs productivity rose and its DAP costs per tonne were reduced by
6 percent. The Swift Creek plant operated according to its original


1997 Rock and Acid Production


<TABLE>
<CAPTION>
                                  PHOSPHATE ROCK                           PHOSPHORIC ACID
                        ANNUAL        1997          1996         ANNUAL         1997          1996       MINE SITE
                       CAPACITY    PRODUCTION    PRODUCTION     CAPACITY     PRODUCTION    PRODUCTION    EMPLOYEES
                                (million tonnes)                        (million P2O5 tonnes)            (active)
<S>                     <C>          <C>          <C>           <C>            <C>           <C>          <C>
Aurora, NC                6.0         4.806        4.331          1.152          1.168        1.164        1,168
White Springs, FL         3.6         3.585        3.143          1.093           .962         .932        1,114
Geismar, LA1                -             -            -           .202           .152            -           53
------------------------------------------------------------------------------------------------------------------
Total                     9.6         8.391        7.474          2.447          2.282        2.096        2,335
</TABLE>



1997 Phosphate Fertilizer Production

(All figures in million product tonnes)


<TABLE>
<CAPTION>
                                    AURORA                         WHITE SPRINGS                  GEISMAR1
                        ANNUAL       1997        1996      ANNUAL      1997        1996      ANNUAL      1997
                       CAPACITY   PRODUCTION  PRODUCTION  CAPACITY  PRODUCTION  PRODUCTION  CAPACITY  PRODUCTION
<S>                    <C>         <C>         <C>         <C>        <C>          <C>        <C>        <C>
Liquid fertilizers
    MGA2                1.835       1.753       1.750      1.908       1.474       1.448      .337        .252
    SPA                  .676        .348        .300      1.138        .788        .751      .196        .121
Solid fertilizers
    DAP                 1.247       1.215       1.117       .662        .724        .642         -           -
</TABLE>

1  Since acquisition on March 6, 1997.

2  A substantial portion is consumed internally in the production of downstream
products. The balance is exported to phosphate fertilizer producers and sold
domestically to dealers that custom-mix liquid fertilizer.

12
<PAGE>   18




1997 Feed Phosphate Production


<TABLE>
<CAPTION>
                             ANNUAL             1997              1996
                            CAPACITY         PRODUCTION        PRODUCTION       EMPLOYEES
                         (million tonnes)  (million tonnes)  (million tonnes)   (active)
<S>                      <C>               <C>               <C>               <C>
Davenport, IA                  .280              .080              .103            27
Marseilles, IL                 .278              .187              .182            38
White Springs, FL (D/M)        .218              .108              .100            20
Weeping Water, NE              .209              .161              .158            42
Kinston, NC                    .141              .070              .071            29
White Springs, FL (DFP)        .100              .079              .083            41
Saltville, VA                  .078              .072              .076            48
-----------------------------------------------------------------------------------------
Total                         1.304              .757              .773           245
</TABLE>

design, as a single product producer of black SPA, and debottlenecking to meet
higher demand helped raise its output above 1996 levels. White Springs began
producing defluorinated phosphoric acid (58 percent P2O5). It set annual
records for rock, sulphuric acid, P2O5, black SPA and DAP, and monthly records
for rock, P2O5, black SPA and DAP.

     Aurora produced record annual volumes of phosphoric acid, 30 percent green
phosphoric acid, 11-37-0, DAP and purified acid. Monthly records were set for
sulphuric acid, P2O5, 30 percent green phosphoric acid, 11-37-0 and purified
acid. Revised mining techniques were utilized to recover ore in demanding
geological conditions.

     Production costs were affected negatively by Aurora's rock conditions and
slightly higher costs for sulphur, but benefited from lower ammonia costs.

FEED PHOSPHATE PRODUCTION

     Dical and Monocal were produced at Weeping Water, Kinston, Marseilles,
Davenport and White Springs facilities; Saltville and White Springs produced
DFP. Marseilles and Weeping Water set daily and annual production records,
Kinston and Davenport daily records, and Saltville a quarterly record.

     Saltville installed a system that lets it use either caustic soda or soda
ash, depending on their prices. With White Springs personnel, it developed a
feed formulation system which significantly improved grade control and reduced
costs. Weeping Water's new process control system was linked to the local area
network so it can monitor plant operations and control production from remote
locations. The White Springs DFP plant increased its capacity by adding new
blowers.

INDUSTRIAL ACID RECORD

     The purified acid plant at Aurora produced a record 0.139 million P2O5
tonnes for industrial use, and reduced its production costs. It operated at 103
percent of its rated capacity. Geismar produced 0.062 million P2O5 tonnes of
high-quality acid for its largest industrial contract.

SAFETY AT THE FOREFRONT

     Employees at White Springs completed 2 million hours without a lost-time
accident in May, and received the Chairman's Award. The mining operation was
inspected by the federal Mine Safety and Health Administration twice during the
year and received no citations. White Springs continued


[PICTURE]

Since White Springs joined PCS , its Swift Creek facility has become one of the
most cost-effective in the phosphate industry.
<PAGE>   19



to train an integrated Emergency Response Team for fire, chemical incidents,
medical treatment and confined space rescue.

     Aurora achieved 1 million hours without a lost-time accident in August
1997, and was presented with the President's Award. It reached 2 million hours
on January 3, 1998. It initiated hazard recognition training and STOP safety
observation training for all employees.

     Both facilities received the new Thoroughbred Chemical Safety Award from
Norfolk Southern Corporation for shipping more than 1,000 carloads of hazardous
materials during calendar year 1996 without a shipper-caused incident.

     Davenport completed 18 years without a lost-time accident and Weeping Water
had its tenth quarterly Mine Safety and Health Administration inspection without
a citation. Marseilles' new barge unloading system significantly reduced safety
hazards and operating costs; the plant completed three years without a lost-time
accident.

TECHNOLOGY SUPPORTS QUALITY

     Aurora modified its superacid process in 1997 to increase its output of
high-quality LoMag liquid fertilizer, and improved its scrubber systems for DAP
to increase ammonia recovery.

     The quality of DAP produced at White Springs now ranks with the best in the
industry. Building on 1996 improvements, a $3-million product cooler was
installed to ensure free-flowing, non-caking DAP. A unit-train concept with
trains of 60 or more cars instituted to supply black SPA to the Weeping Water
feed plant significantly improved utilization of the fleet of lined and
insulated SPA cars.


                                  PCS NITROGEN [PICTURE]

A WEALTH OF UPGRADED PRODUCTS

Nitrogen, part of every living cell, is the fundamental building block of all
plant proteins and improves yield size and quality. Animals need nitrogen for
proper nutrition and maturation, and it is part of the genetic blueprints RNA
and DNA. Plants obtain nitrogen from the atmosphere through lightning or from
bacteria found in nodules on the roots of legumes, but manufactured fertilizer
provides it more effectively. Today, nitrogen products are made from ammonia
synthesized from natural gas, steam and air.

     In 1997, PCS acquired the US nitrogen company, Arcadian Corporation of
Memphis, Tennessee. With seven strategically located plants in the United States
and a complex in Trinidad, it has a wealth of upgraded nitrogen products used as
fertilizer and in industry.

     Ammonia (NH3, 82 percent nitrogen) is the most concentrated form of
nitrogen fertilizer and the feedstock for all value-added nitrogen products.
Annual world ammonia capacity, spread among more than 75 countries, is
approximately 153 million tonnes. Because of this widespread production,
nitrogen is a very regional business, with less trade crossing borders than the
other primary nutrients. China, the United States, India and Russia are the
world's largest producers; China, the US and India are the largest consumers of
nitrogen products. Asia consumes about 45 percent of all nitrogen used
worldwide. The United States is by far the largest importer of ammonia, with
Trinidad, Canada and Russia its primary suppliers.

     Adequate supplies of low-cost natural gas are key to the competitive
production of nitrogen products. This vital input can represent, on average, 
30 percent to 50 percent of PCS Nitrogen's operating budget. It has a purchasing
strategy by which one-third of its natural gas is fixed-priced, one-third is
market-priced and the remaining one-

14

<PAGE>   20



third benefits from natural gas supplies in Trinidad indexed to
ammonia prices in the Caribbean.

     PCS is in a unique position. When the plant in Trinidad scheduled for
completion early in the second quarter of 1998 comes on line, nearly 45 percent
of PCS ammonia will be produced in Trinidad, where its margins are sheltered.
Much of the Trinidad ammonia production goes to Florida producers of DAP. Nearly
half the Company's US nitrogen production goes to industrial customers as
ammonia or upgraded products. PCS can use over a third of the remaining ammonia
for its DAP production. The remainder of its nitrogen business is agricultural
and benefits from its strategic plant locations in the US Midwest and their
positive price differential with the Gulf.

     The most diversified nitrogen producer, PCS produces urea (46 percent
nitrogen), the world's most popular manufactured fertilizer and the major
fertilizer source of nitrogen. It also produces the solid fertilizer ammonium
nitrate (34 percent nitrogen); nitric acid is a feedstock for its production.
Nitrogen solutions (28-32 percent nitrogen) are produced by combining the liquid
forms of urea and ammonium nitrate.

     The Company is a major supplier of industrial nitrogen products, which are
used by industry as raw materials for intermediates in the manufacture of many
products. On average, industrial customers take 80 percent of the urea and
ammonia produced and sold by PCS in the United States, 73 percent of the
ammonium nitrate and all the nitric acid.

     Nitrogen products are used in many familiar products, such as quality nylon
carpets, acrylic  sweaters, plastics for home and car, refrigerants in
automobile air conditioners, automobile paint and tires, resins and adhesives
for the building trade, and pharmaceuticals. Urea is needed for the insulin
product humulin used by eight million diabetics around the world.

     PCS also produces micro prilled urea, a nitrogen-based supplement that
helps build protein in cattle.


[PICTURE]

The low-cost Augusta plant is recognized by outside experts as one of the most
efficient in the United States.




<PAGE>   21




1997 Production*

(Million Tonnes)


<TABLE>
                                                                                        AMMONIUM            NITROGEN
                     AMMONIA1           NITRIC ACID1 2          UREA SOLIDS          NITRATE SOLIDS         SOLUTIONS
                ANNUAL                 ANNUAL                ANNUAL                ANNUAL                ANNUAL
               CAPACITY   PRODUCTION  CAPACITY  PRODUCTION  CAPACITY  PRODUCTION  CAPACITY  PRODUCTION  CAPACITY  PRODUCTION
<S>            <C>        <C>         <C>       <C>         <C>       <C>         <C>       <C>          <C>      <C>
Trinidad        1.192        .923        -           -       .586        .489        -           -         -           -
Augusta, GA      .622        .549      .474        .409      .274        .282      .397        .343      .581        .356
Lima, OH         .525        .388      .097        .075      .329        .192        -           -       .163        .128
Geismar, LA      .476        .404      .560        .441        -           -         -           -      1.028        .873
Memphis, TN      .357        .275        -           -       .399        .249        -           -         -           -
Clinton, IA      .238        .182      .126        .105        -           -       .079        .077      .163        .083
LaPlatte, NE     .182        .143      .178        .125        -           -         -           -       .436        .344
Wilmington, NC     -           -       .161        .087        -           -         -           -       .408        .082
----------------------------------------------------------------------------------------------------------------------------
Total           3.592       2.864     1.596       1.242     1.588       1.212      .476        .420     2.779       1.866
</TABLE>

*  Since acquisition on March 6, 1997.

1  A substantial portion of ammonia and nitric acid is upgraded to value-added
products.

2  HNO3 tonnes.


[PICTURE]


PCS Trinidad ships nitrogen products to the United States and offshore markets
through Point Lisas, on the Gulf of Paria.

NITROGEN PRODUCTION FOR AGRICULTURE AND INDUSTRY

     PCS produced 2.864 million tonnes of ammonia in the ten months after its
acquisition of Arcadian, 68 percent from its plants in the United States and 32
percent in Trinidad. That represented 12 percent of production in the Western
Hemisphere.

     Two major expansions that were under way at the time of acquisition are
continuing. A fourth ammonia plant (04) being added to the Trinidad operations
will raise ammonia capacity there to 1.836 million tonnes and total annual PCS
capacity to 4.236 million tonnes. In response to growing market demand, nitric
acid capacity is being expanded at Geismar. Expansions in ammonia and urea
production capacities at Lima planned before PCS acquired Arcadian were cut
back.

     In 1997, in response to the difficult market for nitrogen solutions, PCS
cut back solutions production at its Wilmington plant - the only nitrogen
facility which does not produce its own ammonia feedstock. The lower-cost
Augusta plant will take over the supply of nitric acid for the Company's
contract with W.R. Grace.

     Augusta set annual production records in ammonia, nitric acid, urea,
ammonium nitrate and nitrogen solutions. Clinton set a record for annual
production of ammonium nitrate, Geismar for ammonia and nitric acid, LaPlatte
for nitrogen solutions and Memphis for ammonia. Memphis, LaPlatte, Lima and
Trinidad's three ammonia units completed turnarounds. Trinidad's 03 ammonia
plant increased production by 10 percent over



<PAGE>   22




design levels after its turnaround, and Trinidad set an annual urea production
record.

     Increased production costs were partially due to the many plant turnarounds
in 1997. Costs of natural gas, a key ingredient in ammonia production, were up
10.6 percent in the United States, but down 15.6 percent in Trinidad.

     On December 31, 1997, PCS Nitrogen had 1,253 employees and 489 contract
workers, including those in Geismar's phosphate operations.

EXPANDING INDUSTRIAL PRODUCTION

     Many of the Company's nitrogen products have widespread industrial uses,
and it is responding to the growing demand for industrial nitrogen products by
expanding its production capabilities. It is building a new nitric acid plant at
Geismar to supply product to a customer that makes methyl diphenyl diisocyanate
(MDI), used in flexible cushioning foams and rigid urethane foams. AC
Industries, Inc., the PCS joint venture with Airgas Carbonics, Inc., expanded
its carbon dioxide liquefaction plant next to the Company's Augusta facility in
1997, making it one of the largest liquid carbon dioxide plants in the world.
Augusta will supply the additional 645 tonnes per day of CO2.

     A plant making caprolactam for carpets and a calcium nitrite plant are also
located adjacent to Augusta. Other industrial plants are located near Geismar,
Lima and Memphis, using PCS products to make MDI, toluene diisocyanate,
acrylonitrile for hard plastics such as bumpers, and feedstock for plastics.

     PCS also produced 0.074 million tonnes of micro prilled urea at Memphis.

SAFETY A PRIORITY

     Safety systems at the nitrogen operations are designed for employee
leadership; they include Behavior Based Safety, with peer-on-peer safety
observations and feedback, and Root Cause investigations. Accumulative safety
records attest to their effectiveness: Geismar has worked more than 3.5 million
hours without a lost-time injury; Clinton exceeded 1.3 million hours without a
lost-time injury and received its fifth Iowa Safety Council Award for
Outstanding Achievement in Accident Prevention; LaPlatte received its fifth
Award of Honor from the Nebraska Safety Council, again with distinction;
Wilmington was presented with its third North Carolina Department of Safety
Award. Lima, an Occupational Safety and Health Administration VPP Star
recipient, exceeded 1 million hours without a lost-time injury; Augusta has gone
a year without a lost-time injury; Memphis achieved two years in December. Plant
employees in Trinidad reached 1 million hours without a lost-time injury on
January 31, 1998, and 3 million hours on the 04 ammonia plant construction
project were completed in February 1998 without an injury. Hurricane procedures
were included in new health, safety and environmental procedures at the Trinidad
facility.

     PCS Nitrogen received Norfolk Southern Corporation's new Thoroughbred
Chemical Safety Award for shipping more than 1,000 carloads of hazardous
materials during a year without a shipper-caused incident.

     Employees are active in local Emergency Planning Commissions, state
Emergency Response Commissions and local Mutual Aid Organizations. They use the
unique ammonia safety training railcar they designed and built to train
community emergency response personnel and customers in the safe handling of
ammonia. Hazardous Materials response teams visit local schools and community
functions to teach about chemical safety; at Geismar alone, more than 1,000
students toured the team's vehicle. Clinton led the way in organizing a farm
safety camp in which its employees taught and more than 500 local residents
participated.

MAJOR WESTERN HEMISPHERE AMONIA PRODUCERS

[GRAPH]

Source: Fertecon, BJA, PCS

When its new Trinidad plant is completed, nearly 45 percent of PCS ammonia will
be produced with gas contracts tied to the price of ammonia.


                                                                            17
<PAGE>   23



[PICTURE]

Total world fertilizer consumption grew in 1997 and PCS increased its customer
base.




<PAGE>   24



                              PCS SALES [PICTURE]

Total world fertilizer consumption grew in 1997 and PCS increased its customer
base.

GROWING GLOBAL SALES OF QUALITY PRODUCTS

PCS became a company producing and selling all three primary nutrients in 1997,
a year when total world fertilizer consumption grew. The Company responded to
increased world potash demand with the highest sales in its history. While
emphasizing higher-margin products in phosphate and nitrogen, it offered the
industry's widest range of products to an expanding customer base. Providing
three nutrients instead of one in a convenient one-stop shopping system, PCS
increased its customer base to about 2,600 in 1997, six times more than when it
produced and sold only potash.

     World potash production totalled an estimated 41.7 million tonnes in 1997,
9 percent more than in 1996. World sales jumped to approximately 42.2 million
tonnes, up 14 percent after a slight decline in 1996. PCS provided 16 percent of
world sales and 28 percent of domestic sales.

     World production of phosphoric acid was up an estimated 2.3 percent.
Production of phosphate fertilizer products totalled about 34 million P2O5
tonnes, and world consumption grew by roughly 3 percent. One of every 19 tonnes
used around the world and one of every 5 tonnes applied to North American fields
came from PCS.

     Worldwide production of ammonia, the feedstock for all nitrogen products,
totalled about 129 million tonnes in 1997 and consumption grew by almost 3
percent.

RECORD POTASH SALES

     After beginning 1997 with one of the best spring seasons in its history,
PCS went on to sell a total of 6.769 million tonnes, topping its all-time sales
record set in 1995 by 13.6 percent. Third-quarter sales set a new company
record, and both domestic and offshore sales surpassed previous annual records.

     World potash sales jumped significantly. Supply was tightened in the second
half of the year by the flooding and closure of Potacan in New Brunswick and the
closure of Eddy in New Mexico. These closures took about 1.6 million tonnes of
annual capacity out of the market.

     North American demand was up and prices climbed throughout the year. Total
demand was an estimated 11.3 million tonnes KCl, 15 percent more than in 1996.


                        PCS SALES VOLUMES BY REGION 1997

[PICTURE]

PCS is firmly established as a reliable international supplier of the three
primary nutrients.



                                                                             19
<PAGE>   25



     China and Brazil bought record volumes and India, with its increased
subsidies, was back in the market. In all, China bought 50 percent more potash
from all suppliers than it had in 1996, a total of 4.6 million tonnes. Brazil,
which achieved favorable prices for its cash crops of soybeans, coffee,
sugarcane and citrus fruits, bought record volumes of potash, nearly 3.5 million
tonnes from all sources. Its total KCl imports were up 16 percent. India is not
a large market for Canpotex but its buying patterns influence sales elsewhere.
The Malaysian market was strengthened by a joint venture there between Canpotex
and International Potash Company of the Former Soviet Union.

DOMESTIC

     PCS sold a record 3.146 million tonnes domestically, including
inter-company sales of 0.129 million tonnes to Florida Favorite Fertilizer. This
was 23 percent more than in 1996 (exclusive of sales to another producer in
1996). The United States market took more than 90 percent; the largest customers
were agricultural co-ops and big national firms.

     The Company made record sales in the first half, with demand in April
setting a record. The removal of Potacan from the market affected supply, and
the year ended with low producer inventories. PCS also achieved record sales in
the second half.

     Higher prices were achieved for September and November, which contributed
to higher realizations in the fourth quarter and for the year. Demand jumped in
the fall as customers bought before announced and expected price increases took
effect, anticipating strong spring demand in 1998 due to the increased acreage
expected to be planted.

OFFSHORE

     PCS sold 3.623 million tonnes of its potash offshore in 1997, 20 percent
above the 1996 total and 1.4 percent more than the previous record of 3.574
million tonnes set in 1995.

     Brazil was again the largest offshore market for PCS New Brunswick,
accounting for 75 percent of its total exports of 0.663 million tonnes.

     Canpotex set an all-time sales record of 5.19 million tonnes in 1997, 25
percent higher than the 4.15 million tonnes it sold in 1996. PCS provided 2.960
million tonnes in 1997. China bought one of every three tonnes sold by Canpotex,
a total of 1.78 million tonnes KCl. Other record markets were New Zealand, where
Canpotex is now the largest supplier, Thailand and Vietnam.

     Although spot prices for standard product were under pressure early in the
year, the offshore market gained strength in the second half. Higher prices were
achieved in Brazil and, in December, in a large sale by Canpotex to China.

INDUSTRIAL

     Six percent of total domestic and offshore sales were industrial. Often
these customers refine the potash further before using it or reselling it for
manufacture of other products. The US is a major industrial market for PCS , but
Japan, Korea and China are also important customers for industrial potash. Sales
of the Company's water softening product Softouch jumped by 20 percent in 1997,
continuing its regular annual growth.


[PICTURE]


After corn, wheat is the crop that uses the most fertilizer in the United
States.
<PAGE>   26



[PICTURE]

North American farmers are producing more grain per acre with the help of
proper fertilization and modern agricultural methods.


LIQUID PHOSPHATES LEAD THE WAY

     World phosphate trade was near an all-time high in 1997, with strong
exports of solid fertilizers and MGA. Sales of DAP by all world suppliers were
similar to 1996 levels. India, with its fertilizer subsidies, and China bought
more, but sales to Pakistan were down. It returned to the market early in 1998.

     Following its policy of emphasizing the phosphate products with the best
margins, PCS cut back in 1997 on offshore sales of MGA and upgraded its
phosphoric acid in North America where prices were better. During the year, it
sold a record 4.434 million tonnes of phosphate products, exceeding 1996
fertilizer sales, maintaining its leadership in sales of phosphate feed
supplements, and increasing sales of industrial products.

FERTILIZER PRODUCTS

     At 3.290 million tonnes, PCS sales of fertilizer products in 1997 were 5
percent above the 3.120 million tonnes sold in 1996, its first full year in the
phosphate business. The Company sold 1.924 million tonnes of solid fertilizers,
divided 58 percent-42 percent between offshore and domestic sales, and 1.366
million tonnes of liquid fertilizers, 32 percent offshore and 68 percent
domestically. Offshore sales are handled through PhosChem, a phosphate export
association which shipped 9 percent more DAP in 1997.

     SOLID FERTILIZERS: Total PCS sales of DAP were slightly up over 1996
levels, 1.924 million tonnes compared to 1.880 million tonnes. PCS sold 1.113
million tonnes offshore, more than half its production, compared to 1.062
million tonnes in 1996. It supplied about one quarter of the 4.36 million tonnes
shipped by PhosChem, which was fully committed in the fourth quarter. China, the
largest offshore buyer, bought more from PhosChem and India also bought
strongly. Those increases were balanced by lower exports to other countries,
primarily New Zealand, Vietnam, Thailand and Argentina. Pakistan did not
purchase from PhosChem but its buying patterns affect world trade.

     The Company sold 0.811 million tonnes of DAP domestically, similar to 1996
levels. DAP prices were below 1996 levels in both offshore and domestic markets.

     LIQUID FERTILIZERS: PCS sold 1.366 million tonnes of liquid fertilizers in
1997, compared to 1.240 million tonnes in 1996. LoMag was the major domestic
product and amber MGA the major export product. PCS supplied 88.5 percent of the
0.42 million solution tonnes of MGA shipped by PhosChem, about the same
percentage as in 1996.

     With tight phosphoric acid utilization worldwide, MGA prices were strong.
Prices for liquid fertilizers were higher than in 1996, and PCS realizations
from liquid fertilizer sales were up 5 percent.

                                                                              21





<PAGE>   27



PHOSPHATE ROCK

     Sales of phosphate rock were sharply down in 1997 to 0.029 million tonnes,
just 15 percent of 1996 sales, as PCS followed its policy of retaining its rock
for its own production.

NON-FERTILIZER PRODUCTS

     The Company's main non-fertilizer products are the phosphate feed
supplements Monocal, Dical and DFP for livestock and poultry, with industrial
phosphates as a specialized market area.

     FEED SUPPLEMENTS: PCS sold 0.752 million tonnes of feed products, down 3
percent from 1996. Sales were divided among Monocal (48 percent), Dical (30
percent) and DFP (20 percent). Feedgrade MAP made up the remainder.

     Domestic sales of Dical were down due to reduced demand throughout the
industry in the first half of the year. Monocal sales were up.

     Exports were a record, up 13 percent. Latin American countries provided the
main markets, with new sales to Asia. Monocal is the main export product.

     Total prices were up 6 percent over 1996 levels.

     INDUSTRIAL PRODUCTS: PCS produces phosphoric acid for industrial purposes
at Aurora and Geismar, and sold 0.363 million tonnes in 1997, 68 percent more
than in 1996. The Aurora production, in a joint venture with Albright & Wilson
Americas, consists of both food-grade acid, for cola beverages, preservatives
and other food products, and technical grade for industrial processes and
products. Geismar's product is sold under contract to Rhodia, Inc. as a
feedstock for its food-grade acid purification plant located adjacent to the
Geismar plant. Prices and volumes provide relatively stable margins in this
business.

PHOSPHATE SALES DISTRIBUTION

[GRAPH]

Source: Fertecon, PCS

Its varied product line allows PCS to shift its feedstock to the products most
in demand by the market, to optimize margins.


[PICTURE]


PCS, the world's largest producer of phosphate feed supplements for livestock
and poultry, sold to new markets in Brazil and Southeast Asia in 1997.

<PAGE>   28



NITROGEN IS UNIQUELY POSITIONED

     As PCS anticipated when it expanded into nitrogen, its wide range of
industrial products provided a steady, profitable base to the nitrogen
fertilizer business. In spite of the fact that capacity utilization in nitrogen
was the highest of all three nutrients and consumption continued to grow, the
market struggled in 1997. Trade and prices were down, compared to 1996.

     China, usually a major purchaser of urea, was absent from the market for
much of 1997, resulting in depressed prices and profits for producers. This also
affected prices of other products. With urea prices down, producers upgraded
less ammonia into urea, increasing ammonia supplies and pulling prices down. The
situation spilled over into the market for nitrogen solutions, affecting prices.
Other influences on solutions prices were new US supply coming on stream,
competitive imports and weak fall demand.

     In spite of these market conditions, the nitrogen component of PCS has
integrated well and continues to provide the Company with increased earnings and
cash flow. Its average price per tonne for nitrogen products fell less than
overall industry prices because of the contribution of PCS industrial products.
The long-term outlook remains favorable. Nitrogen is the fertilizer considered
most essential by farmers and the fastest-growing of the three nutrients. And
China's absence from the urea market had the beneficial effect of causing the
re-evaluation of planned expansions and new plants, many of which were delayed
or cancelled.

     In 1997, PCS sold 6.038 million tonnes of nitrogen products, both
manufactured and purchased. It purchased ammonia through a contract with a
company in the Republic of Russia that expired at the end of 1997. In 1998, PCS
is continuing to purchase ammonia from Former Soviet Union and other producers.


[PICTURE]

Corn uses approximately 40 percent of the nitrogen, phosphate and potash
applied in the United States.


FERTILIZER NUTRIENT CONSUMPTION


[CHART]

Source: FAO, IFA

The rising world population and its demand for more and better food will
encourage continued growth in fertilizer consumption as farmers strive to
increase production.

                                                                              23
<PAGE>   29




FERTILIZER SALES

     Sales of all nitrogen fertilizer products, both manufactured by PCS and
purchased, totalled 4.229 million tonnes; 75 percent of product was manufactured
by PCS . More than 88 percent of sales were domestic, with urea the largest
export item.

     Nitrogen solutions represented the largest fertilizer sales volumes, a
total of 1.732 million tonnes, almost all manufactured. Like liquid phosphate
fertilizers, nitrogen solutions are well-suited to the new conservation tillage
methods and site specific fertilizer applications being used more and more by
North American farmers. Sales of ammonia as fertilizer totalled 1.659 million
tonnes, of which 0.668 million tonnes were manufactured and 0.991 million tonnes
purchased. Urea fertilizer sales totalled 0.701 million tonnes, with offshore
sales making up 49 percent. Sales of ammonium nitrate prills totalled 0.102
million tonnes, all domestic. Sales of other products totalled 0.035 million
tonnes.

INDUSTRIAL SALES

     Sales of nitrogen products for industrial use totalled 1.736 million
tonnes, almost entirely domestic. Ammonia, urea, ammonium nitrate and nitric
acid are all sold for industrial uses at relatively stable prices. While China's
absence from the market affected fertilizer urea sales, demand for industrial
urea was very strong all year long.

     In 1997, PCS signed new long-term ammonia contracts with two major
industrial customers on the Texas Gulf coast. The Company also has long-term
contracts with several large customers which have plants adjacent to its
facilities.

INDUSTRIAL CONSUMPTION

[CHART]

Industrial customers took about 75 percent of the ammonia, urea and ammonium
nitrate produced and sold by PCS in the United States in 1997, and all the
nitric acid.


ANIMAL FEED SUPPLEMENTS

     PCS sold 0.073 million tonnes of nitrogen feed supplements in 1997. All
sales were domestic.

OUTLOOK FOR 1998 AND BEYOND

     The factors that affect fertilizer demand - rising world population and
demand for meat - continue to grow, painting a promising picture for world
fertilizer consumption. Large quantities of grain are necessary to feed the
poultry and livestock being raised to meet world demand for meat, which has
risen by more than 30 percent in the last decade. Much of that increase is
taking place in developing nations where higher incomes encourage greater meat
consumption and more varied diets. Furthermore, grain stocks must be replenished
to ensure global food security at the same time as annual food requirements must
be met.

     To meet the ever-increasing global food requirements from a finite land
base, crop yields must be improved through use of fertilizer and other modern
agricultural methods. This is expected to result in continued demand for the
three PCS nutrients, in 1998 and beyond. Rising meat consumption should bring
increased use of PCS feed supplements for livestock and poultry, and the strong
North American economy is expected to encourage sales of its industrial
products.

     Faced with new and more varied demands for food by their rising
populations, developing countries increasingly recognize the role of fertilizer
in helping to fulfil those demands. They are placing more emphasis on the need
to apply adequate amounts of fertilizer, and on better balance among the three
nutrients.

     China's buying patterns are always important and influential. It is
importing fertilizer to help ensure adequate food supplies for its population,
recognizing that it is less expensive than importing food and more beneficial
locally. It has established potash as a key fertilizer to import, and is
expected to continue buying it and phosphate. When it considers its inventories
manageable, it should resume its urea imports, which would encourage nitrogen
markets. India's purchases depend on its subsidy levels. Good prices for its
agriculture exports should support continued growth in fertilizer consumption in
Brazil.

     Increased trade usually increases prices for the products in demand. Trade
in potash rose an average of 3.5 percent per year over the last three

24
<PAGE>   30



[PICTURE]

China increased its potash and phosphate purchases in 1997, supporting prices.


years. Phosphate trade rose an average of 2 percent per year in the same
period, and nitrogen trade an average of 2.5 percent.

     Healthy North American fertilizer consumption is expected to continue in
1998. More acres are likely to be planted, and the nutrients used by the 1997
crops must be replaced. This demand is expected to help support prices.

     Potash will get additional support. Closure of two mines in 1997 has put
stress on world production, so supply should remain tight. Its recent purchase
of Potacan should help PCS even more easily meet the needs of North American
customers.

     Uncertainty has been created by financial developments in Asia in late
1997, which bear continued attention. About one-fifth of the PCS gross margin
from its three nutrients came from sales to Asia in 1997. Continuing financial
pressures could temporarily dampen growth prospects for fertilizer. However,
many of the Asian countries under financial pressure import fertilizer to use on
crops they grow for export, so both imports and exports are in US dollars. This
creates a natural hedge.

     Outside events may cause temporary problems in the short term but are
unlikely to alter the longer-term promise for the fertilizer industry that is
provided by rising world population and demand for food. The trend line for
fertilizer consumption is seldom a smooth upward sweep, for economic and
political events within each nation and on the broader scene will have an
effect. Over the long term, however, the trend is positive.


CONSERVATION TILLAGE


[GRAPH] 

Source: Conservation Technology Information Center

Environmentally-friendly systems such as reduced till and conservation till,
which are supplanting intensive till among US farmers, favor the liquid
nitrogen and phosphate fertilizers produced by PCS.




                                                                          25
<PAGE>   31





[PICTURE]

Local schoolboys enjoy a swim near PCS New Brunswick.

<PAGE>   32



                           PCS STEWARDSHIP [PICTURE]

THE GROWING PCS FAMILY

     The PCS workforce totalled 5,751 on December 31, 1997, including the
employees of PCS Nitrogen who were incorporated into the Company in March.
Almost two-thirds of PCS employees work in the United States, 28 percent in
Canada and 7 percent in Trinidad. The annual payroll is approximately $239
million.

     The Company presented 710 service awards in 1997, recognizing and rewarding
the long-term commitment of its employees. Scholarships were awarded to 35 sons
and daughters of employees for post-secondary study - 10 Chairman's Awards and
25 Divisional Awards.

JOINING WITH ITS COMMUNITY

     PCS responds each year to requests to support a wide range of causes in the
communities in which it operates. Individual operations also support their local
communities with donations and employee participation in varied activities.
Through its long-standing Matching Gift Program, the Company matches employees'
personal donations to their favorite charities.

     PCS is in the third year of its CDN$5-million contribution to the
University of Saskatchewan First & Best Campaign, and the second year of its
five-year commitment to the North Carolina Museum of Natural Sciences in
Raleigh.

     Corporate office employees and those at Cory, Allan and Patience Lake
increased their contribution to the Saskatoon United Way by 10 percent in 1997,
matched by the Company. Employees received the Gold Award for participation and
the Company its sixth Gold Corporate Award. Employees at White Springs
contributed 118 percent of their goal to the United Way of Suwannee Valley.
Their contribution, matched by the Company, made up 36 percent of the agency's
1997 goal. White Springs contributed to a number of environmental and
educational organizations in Florida.

     Aurora successfully completed its 21st annual Salvation Army campaign,
exceeding previous donations. Employees were leaders in a 24-hour walkathon to
raise money for cancer research, and two groups participated in the
Adopt-a-Highway program, cleaning stretches of the highway leading to the plant
site.

     Local schools receive help from several divisions. Aurora employees took
the Safelife program into local elementary schools. The Augusta nitrogen plant
has adopted two inner city schools; its help ranges from employees tutoring and
doing science demonstrations to funds for special projects and donations of used
computers and office equipment. Clinton partners with an elementary and a high
school; ten employees regularly help in many areas.

     The contributions made by White Springs to the schools in the three
counties around it were recognized by a second straight Commissioner's Business
Recognition Award.

CORPORATE GOVERNANCE

     The responsibility for corporate governance rests with the Board of
Directors of PCS which has the duty to direct the management of the business and
affairs of the Company.

     PCS, having regard to the guidelines published by the Toronto and Montreal
stock exchanges, reports annually with respect to its corporate governance
practices. For a complete review of its governance practices, see the section
entitled "Corporate Governance" in the Company's current proxy circular.

     The Board of Directors is made up of 15 members, 13 of whom are outside
directors. No significant shareholders are represented on the Board.

     There are four committees of the Board, each of which plays a significant
role in the discharge of Board duties and obligations. Each committee (audit,
compensation, environmental affairs and executive) is composed entirely of
outside directors, except the executive committee which is chaired by the Chief
Executive Officer. Each committee is empowered to retain outside advisors.
Individual directors may engage outside advisors at the Company's expense upon
authorization of the executive committee.

                                                                            27
<PAGE>   33


     The Company has adopted a corporate disclosure policy which calls for the
timely public dissemination of material information. Shareholder questions,
comments and concerns may be made to the Senior Vice President, Corporate
Relations, who is responsible for implementing the disclosure policy, to the
Corporate Secretary or to the Company's transfer agent.

SAFEGUARDING THE ENVIRONMENT

     By helping to make existing farmland around the world as productive as
possible, fertilizer works to conserve forests, pastures, wetlands and other
non-agricultural lands. PCS shares in industry efforts to encourage farmers to
use the right amounts of fertilizer at the best time to supply nutrients to
plants at close to optimum levels. It also encourages balanced use of the three
nutrients, for nitrogen is used most efficiently when adequate amounts of
phosphate and potash are supplied.

     PCS takes seriously its responsibilities to fulfil the terms of the
environmental permits and other applicable federal, provincial, state and local
laws and regulations that govern air emissions, waste water discharges, land use
and solid and hazardous waste management at its operations in Canada, the United
States and Trinidad. Corporate environmental policy requires PCS to manage its
operations responsibly to safeguard the natural resources related to or affected
by its activities. The policy requires each production unit to work diligently
to minimize potential risks to the environment and to comply with environmental
legislation and regulations. The Company allots both capital and operating funds
to environmental measures, and the Board's environmental affairs committee
reviews all environmental audit reports.

POTASH AND ITS ENVIRONMENT

     Their facilities for controlling pollution, managing wastes and maintaining
air quality are constantly improved by the PCS potash operations. Environmental
audits were completed at all divisions in 1997 by the Director, Environmental
Affairs for potash, to ensure compliance with regulations and corporate policy.

     Construction began in 1997 on an impervious cutoff wall to prevent
sub-surface seepage from Rocanville's waste management area. This wall will be
the longest and deepest in Canada and second longest in North America when it is
completed in 1998. It incorporates design features developed through research
sponsored by the Saskatchewan potash industry.

     New Brunswick improved its refining process and loading procedures to
eliminate dust emissions concerns at Saint John during potash ship loading.

     PCS continued to participate in the environmental research program on
improved management of potash wastes and decommissioning of plants that is
jointly supported by members of the Saskatchewan Potash Producers Association.
Two projects were sponsored in 1997 and further studies are evaluating the
technology. PCS is also conducting in-house research aimed at developing
technology that will extend the life of waste management areas.

     As required, PCS Potash submitted to the Saskatchewan Department of
Environment and Resource Management a decommissioning and reclamation plan for
each of its Saskatchewan mines. An initial response has been received by the
Company and discussions are ongoing. Financial assurance for the plans must be
arranged by March 31, 1999 or within one year after approval of the plan,
whichever is later.



[PICTURE]


United States and North Carolina awards in 1997 applauded Aurora's land
reclamation achievements.
<PAGE>   34




PHOSPHATE AND ITS ENVIRONMENT

     Internal audits were conducted at all phosphate facilities in 1997, and a
small number of issues were identified and corrected.

     Environmental operating expenditures at Aurora and White Springs included
spending for their environmental departments and pollution control equipment.
Major capital items were improvements to pond water and spill prevention
systems.

     The total quantity of phosphorus and nitrogen compounds leaving the White
Springs site was reduced by 11 percent from 1996 levels, for a total reduction
of 72 percent since 1989-90.

     Environmental projects at the Company's feed plants included the addition
of a fugitive dust collection system at Kinston, significantly improving the
work environment.

     LAND RECLAMATION: PCS is a phosphate industry leader in reclaiming the
lands it has mined.

     The reclamation work that transformed the Charles Tract clay ponds at
Aurora into a forested wildlife habitat was recognized with the National Mine
Reclamation Award in the Non-coal Category from the Interstate Mining Compact
Commission, and the North Carolina Mining Commission's Statewide Reclamation
Award for best reclamation at a large mine in the state in 1996. The planting of
2,700 trees along the relocated portion of Bailey Creek and 231,000 trees at the
Parker Farm was completed in February, and the agricultural portion of the
Parker Farm was restored to wetlands.

     White Springs obtained the final approvals for its life-of-mine Conceptual
Reclamation Plan, a first-of-its-kind agreement with the state of Florida for
revised on-site reclamation standards in return for payments for off-site
purchase of environmentally sensitive lands. The first $1.5-million payment was
made to a fund administered by the Florida Department of Environmental
Protection under this plan.

NITROGEN AND ITS ENVIRONMENT

     In 1997, internal environmental audits were conducted at three of the
Company's nitrogen facilities. No significant issues of non-compliance were
identified. All the Company's nitrogen facilities in the US have applied for
permits for air emissions under Title V, the new federal regulation governing
emissions, and anticipate audits by the Environmental Protection Agency in 1998.

     Toxic release inventory (TRI) emissions at PCS Nitrogen plants are down 32
percent since 1992, including a 7-percent reduction in 1996. Lima achieved the
greatest improvement, cutting emissions by 23 percent, and they will be reduced
further when the expansion of its granular urea capacity is completed.
Reportable quantity releases from Geismar were reduced to zero, from 23 in 1996.

     The Augusta plant was named Air Quality Citizen of the Year by Georgia's
Chamber of Commerce and Department of Natural Resources for its reduction in
nitric oxide discharge. It cut the frequency of reportable quantity releases and
permit excursions by 84 percent. After two years of planning, Augusta presented
its Risk Management Program for Augusta-Richmond County at a public meeting
which drew wide attention. Risk Management Programs are federally-mandated, but
Augusta exceeded the requirements by partnering with local regulators and
industrial groups to prepare a public presentation. The Company's other US
nitrogen facilities plan similar presentations in 1998.

     TRI emissions were down 21 percent at the Trinidad facility due to
improvements and recycling in urea production, and process improvement of the
granulation stacks. Trinidad is adding a special environmental laboratory.

     Major capital improvements in the environmental area included installation
of secondary containment systems at LaPlatte and Clinton, an aerator system in
the effluent stream at Memphis, ammonia storage tank flare and compressor
system, urea mix tank scrubber, and scrubbers on the SPA trains at Geismar, and
oil skimmers in Trinidad.

PCS ENVIRONMENTAL EXPENDITURES

[CHART]

PCS operations are constantly improving their efforts to safeguard the
environment and natural resources related to their activities.

                                                                              29





<PAGE>   35







[PICTURE]

White Springs reclaimed 775 acres in 1997, maintaining the existing trees and
vegetation to provide immediate habitat for wildlife and waterfowl, including
the rate whistling duck.
<PAGE>   36


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

                            PCS ANALYSIS  [PICTURE]

     On March 6, 1997, the Company acquired Arcadian Corporation ("Arcadian")
through the merger of Arcadian into a wholly-owned subsidiary of PCS, PCS
Nitrogen, Inc. Under the terms of the merger, shareholders of Arcadian received
$12.25 in cash and 0.17713 of a common share of PCS for each outstanding share
of common stock of Arcadian. Each outstanding share of Arcadian preferred stock
was converted into 0.948 of a share of Arcadian common stock immediately prior
to the effective time of the merger. The Company utilized a $1.45 billion credit
facility to finance part of the acquisition. Immediately prior to closing,
Arcadian redeemed certain mortgage notes using funds obtained from existing cash
and short-term investments. Concurrent with the closing, the Company purchased
Arcadian senior notes through a tender offer and financed such offer from
existing cash and short-term investments and from borrowings under the credit
facility and a short-term bank loan.

1997 VERSUS 1996

     With the exception of purchased product, nitrogen data for 1997 is only for
the period subsequent to the acquisition of Arcadian. Phosphate data for 1997
includes phosphate produced after March 6, 1997 by the acquired Geismar
operation.

OVERVIEW

     Net sales revenue and net income for the year ended December 31, 1997
improved 66 percent and 42 percent, respectively, over 1996. Net income was
$297.1 million (1996 - $209.0 million) on net sales revenue of $2,325.9 million
(1996 - $1,403.9 million), or $5.68 per share (1996 - $4.59 per share). The
$922.0 million increase in net sales revenue is comprised of: potash $101.0
million; phosphate $61.6 million and nitrogen $759.4 million (the additional
nitrogen net sales revenue is primarily due to the acquisition of Arcadian).
Gross margin and operating income were $585.2 million and $447.6 million,
respectively, compared to a gross margin of $384.0 million and operating income
of $299.5 million for 1996 (increases of 52 percent and 49 percent,
respectively).

     For 1997, North American and offshore net sales revenue was $1,665.2
million (1996 - $847.8 million) and $660.7 million (1996 - $556.1 million),
respectively. North American net sales revenue represented 72 percent (1996 - 
60 percent) of total net sales revenue, whereas offshore sales represented 
28 percent of total net sales revenue

                                                                              31
<PAGE>   37


(1996 - 40 percent). The change in the relative weighting of net sales revenue
is due to the fact that 92 percent of nitrogen net sales revenue is earned in
North America.

1997 GROSS MARGIN BY QUARTER

[CHART]

Quarterly gross margin shows the benefit of the PCS acquisition strategy and the
merits of producing three nutrients.

     Potash, phosphate and nitrogen net sales revenue for 1997 was $504.2
million (1996 - $403.2 million), $953.6 million (1996 - $892.0 million), and
$868.1 million (1996 - $108.7 million), respectively.

     Gross margin for 1997 increased $201.2 million or 52 percent over 1996.
Gross margin for potash products was $257.6 million (an increase of $67.0
million); gross margin for phosphate products was $194.4 million (an increase of
$3.1 million); and gross margin for nitrogen products was $133.2 million (an
increase of $131.1 million which is primarily due to the acquisition of
Arcadian).

     The increase in net income of $88.1 million when comparing 1997 with 1996
is attributable to a $67.0 million increase in potash gross margin and a $131.1
million gross margin contributed by nitrogen. This increase in gross margin was
offset by: $31.6 million of nitrogen selling and administrative expense
(including amortization of goodwill); a $30.1 million increase in provincial
mining and other taxes; a $34.7 million increase in interest expense relating to
the acquisition of the nitrogen operations; and a $25.4 million increase in the
provision for income taxes.

POTASH REVENUE

     Potash net sales revenue for 1997 was $504.2 million (1996 - $403.2
million), representing 22 percent of consolidated net sales revenue. The Company
sold 6.640 million tonnes of potash in 1997, compared to 5.612 million tonnes
sold in 1996, an increase of 1.028 million tonnes or 18 percent. Gross margin
for potash products was $257.6 million (1996 - $190.6 million) or 44 percent of
consolidated gross margin.

     North American and offshore potash sales volumes increased 16 percent and
20 percent, respectively, over 1996. Potash prices in the offshore market
decreased early in the year but had recovered to 1996 levels by the end of the
third quarter resulting in flat prices on a year-over-year basis. Price
increases of 14 percent were realized in the domestic market. Comparisons are
affected by sales to another producer during 1996.

     North American net sales revenue from potash operations represented 42
percent (1996 - 39 percent) of the potash net sales revenue of the Company. The
closure of Potacan's mine due to flooding and the announced closure of another
competitor's mine in New Mexico tightened supply which influenced successive
domestic price increases in September and November. The increase in North
American potash prices and an increase in North American sales volumes resulted
in a $52.6 million increase in North American potash net sales revenue over
1996. North American potash sales volumes for 1997 increased by 0.428 million
tonnes (1997 - 3.017 million tonnes; 1996 - 2.589 million tonnes). Of the 3.017
million tonnes for 1997, 2.813 million tonnes (1996 - 2.438 million tonnes) came
from Saskatchewan, 0.122 million tonnes (1996 - 0.079 million tonnes) from New
Brunswick and 0.082 million tonnes (1996 - 0.072 million tonnes) from Utah.


1997 POTASH NET SALES REVENUE BY MARKET

[GRAPH]

Potash sales offshore provide the highest prices, and that is where PCS sells
more of its product.

     Offshore net sales revenue from potash operations represented 58 percent
(1996 - 61 percent) of potash net sales revenue of the Company. Strong offshore
volumes contributed to higher prices during the year. In December, Canpotex
signed a new contract with China at higher prices. The increase in offshore
sales volumes resulted in a $48.4 million increase in offshore potash net sales
revenue. In the offshore market, the Company sold 3.623 million potash tonnes
during 1997 (1996 - 3.023 million tonnes), an increase of 20 percent. Of the
3.623 million tonnes, 2.960 million tonnes were sold through Canpotex and the
remaining 0.663 million tonnes were produced by PCS New Brunswick and sold and
delivered to offshore markets by PCS Sales.

PHOSPHATE REVENUE

     The acquired Geismar operation increased P2O5 production, liquid sales and
industrial sales.

32

<PAGE>   38


     Phosphate net sales revenue for the year ended December 31, 1997 was $953.6
million, representing 41 percent of consolidated net sales revenue. The
distribution of this revenue was as follows: liquid phosphate fertilizer $277.6
million (29 percent); solid phosphate fertilizer $362.6 million (38 percent);
animal feed $191.0 million (20 percent); industrial products $121.0 million (13
percent) and phosphate rock $1.4 million. For 1996, net sales revenue was $892.0
million; liquid phosphate fertilizer $239.7 million (27 percent); solid
phosphate fertilizer $379.3 million (43 percent); animal feed $186.1 million (21
percent); industrial products $80.7 million (9 percent) and phosphate rock $6.2
million. Gross margin for phosphate was $194.4 million (1996 - $191.3 million)
or 33 percent of consolidated gross margin.

     For 1997, North American phosphate net sales revenue accounted for $656.9
million (1996 - $581.4 million) or 69 percent (1996 - 65 percent) of total
phosphate net sales revenue. In 1997, 56 percent (1996 - 57 percent) of the
Company's North American phosphate net sales revenue was earned from phosphate
fertilizer products which represented 63 percent (1996 - 63 percent) of its
North American phosphate sales volumes. Offshore sales accounted for 31 percent
(1996 - 35 percent) of total phosphate net sales revenue for 1997 and 38 percent
(1996 - 42 percent) of volumes. In 1997, 92 percent (1996 - 92 percent) of the
Company's offshore phosphate net sales revenue was earned from phosphate
fertilizer products, which represented 93 percent (1996 - 85 percent) of its
offshore phosphate sales volumes.

1997 PHOSPHATE NET SALES REVENUE BY PRODUCT

[GRAPH]

PCS sells its diversified phosphate product line to a wide variety of customers
for a wide variety of end uses.

     Net sales revenue from liquid and solid fertilizers was $640.2 million
(1996 - $619.0 million) with sales volumes of 3.290 million tonnes (1996 - 3.120
million tonnes). Solid phosphate fertilizer (substantially all DAP) accounted
for 38 percent (1996 - 43 percent) or $362.6 million (1996 - $379.3 million) of
the total phosphate net sales revenue. North American net sales revenue from
liquid and solid fertilizers was $367.5 million (1996 - $332.8 million) with
sales volumes of 1.745 million tonnes (1996 - 1.569 million tonnes). Compared to
1996, the Company received higher prices for most of its phosphate products
(with the exception of DAP and industrial products, the latter due to product
mix). Liquid fertilizer prices increased by 5 percent and sales volumes
increased by 10 percent, resulting in additional net sales revenue of $37.9
million. Solid phosphate fertilizer prices declined 7 percent as compared to
1996. However, this was partially offset by a volume increase of 2 percent,
resulting in a reduction of net sales revenue of $16.7 million.

     Net sales revenue from animal feed and industrial products during 1997 was
$312.0 million (1996 - $266.8 million) with sales volumes of 1.115 million
tonnes (1996 - 0.994 million tonnes). North American net sales revenue was 93
percent of total animal feed and industrial products in 1997 (1996 - 93
percent). Animal feed prices increased 6 percent and volumes decreased 3 percent
as compared to 1996. This resulted in additional net sales revenue of $4.9
million. Industrial product prices declined by 11 percent while sales volumes
increased by 68 percent (the changes are partially due to the acquisition of
Arcadian). The result was additional net sales revenue of $40.4 million. Gross
margin provided by feed and industrial products increased by 26 percent over
last year.

NITROGEN REVENUE

     Arcadian was acquired in March 1997. Nitrogen net sales revenue for the
year was $868.1 million. North American net sales revenue for the year accounted
for 92 percent of the total nitrogen net sales revenue. Net sales revenue
includes $201.6 million of purchased nitrogen products for resale. Manufactured
nitrogen net sales revenue for the ten months ended December 31, 1997 was $666.5
million. The distribution of this revenue was as follows: ammonia $183.8 million
(28 percent); urea $203.1 million (30 percent); nitrogen solutions $161.1
million (24 percent) and other nitrogen

                                                                              33
<PAGE>   39



1997 MANUFACTURED NITROGEN NET SALES REVENUE BY PRODUCT

[GRAPH]

PCS became a three-nutrient fertilizer producer in March, and had revenue of
$667 million from manufactured nitrogen products in 1997 and $201 million from
sale of purchased product.


products $118.5 million (18 percent). Gross margin for nitrogen products was
$133.2 million or 23 percent of consolidated gross margin.

     From the date of acquisition, sales tonnes for manufactured nitrogen
products were as follows: ammonia 1.061 million tonnes; urea 1.226 million
tonnes; nitrogen solutions 1.719 million tonnes and other nitrogen products
0.894 million tonnes. Purchased nitrogen products sales tonnes for 1997 were
1.138 million tonnes.

     Limited imports of urea into China resulted in pricing pressures throughout
the world. Ammonia prices have declined since the acquisition, but results were
supported by the Company's strategic plant locations in North America and its
favorable gas contracts in Trinidad.

COST OF GOODS SOLD

     For the year ended December 31, 1997, the Company produced 6.483 million
potassium chloride (KCl) tonnes, compared to 5.782 million tonnes in 1996, an
increase of 0.701 million tonnes (12 percent). The Company produced 2.282
million P2O5 tonnes of phosphoric acid from its phosphate operations, compared
to 2.096 million tonnes in 1996, an increase of 0.186 million tonnes (mainly due
to the acquisition of the Geismar operations). From the date of acquisition,
nitrogen production was 2.349 million nitrogen (N) tonnes.

     Potash unit cost of sales decreased marginally in 1997 compared to 1996,
due primarily to higher production volumes and fewer shutdown weeks.

Phosphate unit cost of sales in 1997 for feed products decreased by 2 percent
and industrial products decreased by 3 percent as compared to the same period
in the prior year. However, this was offset by an increase of 5 percent in the
unit cost of sales of liquid fertilizer. These increased costs were primarily
caused by increased rock costs as a result of excessive moisture in the
overburden at Aurora. The unit cost of sales of solid fertilizer remained
unchanged during 1997. The input cost of sulphur increased and ammonia
decreased as compared to 1996.

     PCS Nitrogen, through its natural gas hedging program and favorable gas
contracts in Trinidad,  has kept its per unit natural gas cost relatively flat.

     Depreciation and amortization expense for 1997 was $170.0 million compared
to $90.1 million in 1996, an increase of $79.9 million or 89 percent. The
increase is largely attributable to $69.0 million additional depreciation and
amortization from the acquired nitrogen operations.

SELLING AND ADMINISTRATIVE

     Selling and administrative expenses for 1997 were $99.7 million as compared
to $60.1 million in 1996, an increase of $39.6 million. The increase is
attributable to the acquisition of Arcadian ($31.6 million including
amortization of goodwill of $12.2 million) and to general increases in supplies,
compensation and benefits.

PROVINCIAL MINING AND OTHER TAXES

     Saskatchewan's Potash Production Tax is comprised of a base tax per tonne
of product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial Crown
royalty, which is accounted for under cost of goods sold.

     For 1997, provincial mining and other taxes were $70.3 million as compared
to $40.2 million in 1996, an increase of $30.1 million. Potash production tax
was $53.5 million compared to $27.5 million in 1996, an increase of $26.0
million. The increased sales volumes in 1997 over 1996 have served, in part, to
increase the taxes. In addition, increased prices for potash and the resulting
increased profit per tonne, combined with the full utilization of certain
provincial resource tax deductions carried forward from prior years, has
resulted in most Saskatchewan mines reaching the top marginal profits tax rate
of 50 percent in 1997.

34


<PAGE>   40



     Saskatchewan corporate capital tax was $16.8 million in 1997 compared to
$12.7 million in 1996, an increase of $4.1 million. Various other payments to
the province in the form of royalties and taxes totalled $14.8 million in 1997
and $12.1 million in 1996, and are reflected in cost of goods sold.

INTEREST EXPENSE

     For 1997, interest expense was $81.4 million as compared to $46.8 million
in 1996. The weighted average long-term debt outstanding in 1997 was $1.1
billion (1996 - $0.7 billion). The increase is due to the financing of the
Arcadian acquisition. The weighted average interest rate on the long-term debt
outstanding increased to 6.1 percent in 1997 from 5.8 percent in 1996. The
increase is primarily due to the higher interest rate on the ten-year notes
issued in June 1997.

INCOME TAXES

     Income taxes for the year were $69.1 million, compared to $43.7 million in
1996, an increase of $25.4 million. The increase reflects higher taxable
earnings relating to the Company's phosphate operations and taxes relating to
the Company's acquired nitrogen operations.

     PCS and certain subsidiaries are subject to federal and provincial income
taxes in Canada. By virtue of deductions with respect to non-capital losses
carried forward, capital cost allowance, Canadian development expense, and
earned depletion allowance, such taxes have not yet become payable. However, PCS
is subject to the Large Corporations Tax. In 1997, PCS began to book a deferred
tax provision at the effective rate of 35 percent since the tax pools plus the
non-capital losses carried forward are less than the book value of the assets.
Assuming the status quo, the Company is likely to begin paying some Canadian
income tax before the end of the decade.

     The Company's subsidiaries which operate in the United States are subject
to US federal and state income taxes. By virtue of certain income tax deductions
available, these subsidiaries are not currently subject to regular cash income
taxes. However, they are subject to the Alternative Minimum Tax, which may be
carried forward indefinitely as a credit to be applied against future regular
income tax liabilities. In addition, the Company is subject to United States
withholding tax on certain payments received from its US subsidiaries. The tax
rate applicable to the US operations for 1997 was approximately 21 percent of
income before taxes, of which 9 percentage points represented deferred income
taxes and 12 percentage points represented cash taxes. This rate for 1996 was
approximately 24 percent of income before taxes, of which 14 percentage points
represented deferred income taxes and 10 percentage points represented cash
taxes.

     The Company's nitrogen subsidiaries which operate in Trinidad are subject
to Trinidad taxes. The foreign tax rate applicable to the Trinidad operations
for 1997 is approximately 37 percent of income before taxes.


[PICTURE]

Cotton, grown in more than 75 countries including Australia, benefits from the
correct application of potash and is a growth market for this nutrient.

1996 VERSUS 1995

     Results for 1995 do not include (1) the results of White Springs prior to
October 31, 1995, the date of acquisition, and (2) the results of PCS Phosphate
(formerly Texasgulf Inc.) prior to April 10, 1995, the date of acquisition.

                                                                              35



<PAGE>   41

OVERVIEW

     Net sales revenue and net income for 1996 improved 64 percent and 31
percent, respectively. Net income for 1996 was $209.0 million (1995 - $159.5
million) on net sales revenue of $1,403.9 million (1995 - $856.1 million), or
$4.59 per share (1995 - $3.68 per share). The $547.8 million increase in net
sales revenue is comprised of: potash $(17.8) million; phosphate $479.8 million
and ammonia $85.8 million. For 1996, gross margin and operating income were
$384.0 million and $299.5 million, respectively, compared to a gross margin of
$306.9 million and an operating income of $224.2 million for 1995 (increases of
25 percent and 34 percent, respectively).

     For 1996, North American and offshore net sales revenue was $847.8 million
(1995 - $438.1 million) and $556.1 million (1995 - $418.0 million),
respectively. North American net sales revenue represented 60 percent (1995 - 51
percent) of total net sales revenue, and offshore net sales revenue represented
40 percent of total net sales revenue (1995 - 49 percent).

     Potash, phosphate and ammonia net sales revenue for 1996 was $403.2 million
(1995 - $421.0 million), $892.0 million (1995 - $412.1 million), and $108.7
million (1995 - $23.0 million), respectively.

     Gross margin for 1996 increased $77.1 million or 25 percent over 1995.
Gross margin for potash was $190.6 million, a decrease of $27.0 million compared
to 1995. Gross margin for phosphate products and ammonia was $193.4 million
(1995 - $89.3 million). Domestic fertilizer sales were strong in both potash and
phosphate nutrients as customers purchased during the summer fill program in
anticipation of a good fall application period.

     The increase in net income of $49.5 million for 1996 is largely
attributable to an additional $565.6 million in net sales revenue from the
phosphate and ammonia acquisitions, and a 7 percent decrease in Saskatchewan
provincial mining and other taxes. This was offset by a decrease in potash net
sales revenue of $17.8 million, an increase in interest expense of $4.9 million
relating to a full year's interest cost on debt financing of $878.8 million
incurred to purchase PCS Phosphate and White Springs, a $470.7 million increase
in cost of sales, a $20.7 million increase in income taxes, and an increase in
selling and administrative expenses of $6.5 million.

     Although the Company had increased earnings in 1996 compared to 1995,
market conditions in North America did not live up to expectations for the
fertilizer industry in general. A cold and wet spring put a damper on the
domestic market, resulting in a delayed seeding and harvest season. However,
sales rebounded in the summer and continued high through the fall, when farmers
purchased product to replace the nutrients depleted by higher yielding crops. In
the export market, large purchases at the end of 1995 and subsidy issues
resulted in lower sales volumes of potash and DAP to China and India during 1996
compared to 1995. Both countries carried large potash inventories over from
1995, affecting 1996 purchases. Shipments to Brazil, the third major potash
customer among developing nations, began 1996 slowly but it bought record
volumes after resolving some of its finance and economic issues.

POTASH REVENUE

     Potash net sales revenue for 1996 decreased by $17.8 million or 4 percent
as compared to 1995 (1996 - $403.2 million; 1995 - $421.0 million). The Company
sold 5.612 million tonnes of potash in 1996, compared to 5.848 million tonnes
sold in 1995, a decrease of 0.236 million tonnes or 4 percent. Potash prices
were up 1 percent (excluding sales to another producer).

     In 1996, North American and offshore potash sales volumes increased 14
percent and decreased 15 percent, respectively, compared to 1995. Part of this
increase (7 percent) was due to a full year of sales of production from Moab,
Utah, as well as sales to a competitor during its strike. Scheduled price
increases for the first quarter of 1996 were not attained and domestic customers
bought mainly during the summer prior to announced price increases. Exclusive of
sales to another producer, prices received from domestic customers were down 5
percent. Potash prices increased 6 percent in the offshore market. Offshore New
Brunswick price realizations in 1996 were flat in comparison to 1995.

     North American net sales revenue from potash operations represented 39
percent of the potash net sales revenue of the Company during 1996 (1995 - 35
percent). The increase in North American potash sales volumes and the decrease
in North American prices resulted in a $11.5 million increase in North American
potash net sales revenue over 1995. North American potash sales volumes for 1996
increased 0.316 million tonnes (1996 - 2.589 million tonnes; 1995 - 2.273
million tonnes) compared to 1995. Of the 2.589 million tonnes for 1996 (1995 -


36
<PAGE>   42


2.273 million tonnes), 2.438 million tonnes (1995 - 2.137 million tonnes) came
from Saskatchewan, 0.079 million tonnes (1995 - 0.078 million tonnes) from New
Brunswick and 0.072 million tonnes (1995 - 0.058 million tonnes) from Utah.
Sales volumes to another producer were 0.133 million tonnes.

     In 1996, offshore net sales revenue from potash operations represented 61
percent of potash net sales revenue of the Company (1995 - 65 percent). The
decrease in offshore sales volumes and the 6 percent increase in overall
offshore selling price resulted in a $29.3 million decrease in offshore potash
net sales revenue compared to 1995. In the offshore market, the Company sold
3.023 million potash tonnes during 1996 (1995 - 3.574 million tonnes), a
decrease of 15 percent. The principal reason for the decrease was lower sales to
China through Canpotex. Of the 3.023 million tonnes, 2.400 million tonnes were
sold through Canpotex and the remaining 0.623 million tonnes were produced by
PCS New Brunswick and sold and delivered to offshore markets, such as Brazil, by
PCS Sales.

[PICTURE]

Coffee, one of Brazil's major exports, requires ample application of
fertilizer.

PHOSPHATE REVENUE

     Phosphate net sales revenue for the year ended December 31, 1996 was $892.0
million. The distribution of this revenue was as follows: liquid phosphate
fertilizer $239.7 million (27 percent); solid phosphate fertilizer $379.3
million (43 percent); animal feed $186.1 million (21 percent); industrial
products $80.7 million (9 percent) and phosphate rock $6.2 million. For 1995 net
sales revenue was $412.1 million; liquid phosphate fertilizer $106.3 million (26
percent); solid phosphate fertilizer $151.2 million (37 percent); animal feed
$94.5 million (23 percent); industrial products $55.1 million (13 percent) and
phosphate rock $5.0 million. Gross margin for phosphate was $193.4 million (1995
- $89.4 million) or 50 percent of consolidated gross margin.

     For 1996, North American phosphate net sales revenue accounted for $581.4
million (65 percent) of total phosphate net sales revenue of $892.0 million. In
1996, 57 percent of the Company's North American phosphate net sales revenue was
earned from phosphate fertilizer products which represented 63 percent of its
North American phosphate sales volumes. Offshore sales accounted for 35 percent
of total phosphate net sales revenue for 1996 and 42 percent of volumes. In
1996, 92 percent of the Company's offshore phosphate net sales revenue was
earned from phosphate fertilizer products which represented 85 percent of its
offshore phosphate sales volumes.

     For 1996, net sales revenue from liquid and solid fertilizers was $619.0
million (1995 - $257.5 million) with sales volumes of 3.120 million tonnes (1995
- 1.399 million tonnes). Solid phosphate fertilizer (substantially all DAP)
accounted for 43 percent or $379.3 million of the total phosphate net sales
revenue. Offshore net sales revenue from DAP accounted for 56 percent of solid
fertilizer net sales revenue while North American net sales revenue from liquid
fertilizer accounted for 69 percent of liquid fertilizer net sales revenue. The
average net sales prices for liquid and solid fertilizer improved by 11 percent
and 5 percent, respectively. Export liquid and solid fertilizer sales prices
improved by 7 percent and 8 percent, respectively, compared to the same period a
year ago. North American liquid and solid fertilizer sales prices improved 5
percent and 2 percent, respectively, compared to 1995.


                                                                              37
<PAGE>   43


     Net sales revenue from animal feed and industrial products during 1996 was
$266.8 million (1995 - $149.6 million) with sales volumes of 0.994 million
tonnes (1995 - 0.596 million tonnes). For 1996, feed sales tonnage was 0.778
million tonnes (1995 - 0.428 million tonnes) with 11 percent sold to offshore
markets such as South and Central America and Asia, while the remaining 0.216
million tonnes (1995 - 0.168 million tonnes) were industrial products sold to
North American customers. Feed product prices for 1996 improved by 8 percent
over 1995. North American industrial selling prices increased by 14 percent
compared to 1995.

AMMONIA REVENUE

     Ammonia sales for 1996 contributed $108.7 million (1995 - $23.0 million) to
net sales revenue with sales volumes of 0.535 million tonnes, (1995 - 0.115
million tonnes). Ammonia sales are comprised of the resale of purchased product.

COST OF GOODS SOLD

     For 1996, the Company produced 5.782 million potassium chloride (KCl)
tonnes, compared to 6.071 million tonnes in 1995, a decrease of 0.289 million
tonnes (5 percent) compared to 1995. It produced 2.096 million phosphoric acid
(P2O5) tonnes from its phosphate operations, compared to 1.008 million tonnes in
1995.

     Potash unit cost of sales increased by 7 percent compared to 1995 due in
part to a greater proportion of higher cost New Brunswick product in the mix and
a slight increase in the number of shutdown weeks (the number of mineweeks of
shutdown is at the discretion of management). Regarding phosphate, lower sulphur
and ammonia costs were offset by a full year of higher cost White Springs
products.

     Depreciation expense for 1996 was $90.1 million compared to $71.0 million
in 1995, an increase of $19.1 million or 27 percent. The increase is the result
of $22.8 million additional depreciation from the acquired phosphate operations.
Depreciation expense for the potash operations decreased by $3.6 million as a
result of reduced production.

SELLING AND ADMINISTRATIVE

     During 1996, selling and administrative expenses were $60.1 million
compared to $54.1 million in 1995. The $6.0 million increase is attributable to
the acquisitions of PCS Phosphate and White Springs and to general increases in
travel, supplies, compensation and benefits.

PROVINCIAL MINING AND OTHER TAXES

     Saskatchewan's Potash Production Tax is comprised of a base tax per tonne
of product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial Crown
royalty, which is accounted for under cost of goods sold.

     Increased profitability at certain of the mines increased the rate of taxes
paid to the Saskatchewan government but total taxes were reduced by lower prices
and potash sales volumes from Saskatchewan. For 1996, Saskatchewan provincial
mining and other taxes were $40.2 million compared to $43.4 million in 1995, a
decrease of 7 percent. Potash production tax for 1996 was $27.5 million compared
to $29.6 million in 1995, a decrease of 7 percent. Saskatchewan corporate
capital tax was $12.7 million in 1996 compared to $13.8 million in 1995, a
decrease of 7 percent. Various other payments to the province in the form of
royalties and taxes totalled $12.1 million in 1996 and $12.9 million in 1995 and
are reflected in cost of goods sold.

INTEREST EXPENSE

     For 1996, interest expense was $46.8 million compared to $41.8 million in
1995. The 1996 amount includes the interest incurred for the full year in
respect of the acquisitions made in 1995, while the 1995 amount includes
interest expense only after each of the respective acquisitions in April and
October.

INCOME TAXES

     Income taxes in 1996 were $43.7 million, compared to $22.9 million in 1995,
an increase of $20.8 million. The increase is largely attributable to US
withholding taxes, alternative minimum taxes and deferred income tax, relating
to the Company's acquired phosphate operations which operated the full year
under PCS ownership.

     PCS and certain subsidiaries are subject to federal and provincial income
taxes in Canada. By virtue of deductions with respect to non-capital losses
carried forward, capital cost allowance, Canadian development expense, earned
depletion allowance, and resource allowance, such taxes have not yet been
payable by the Company. However, it is subject to the Large Corporations Tax. At
December 31, 1996, the Canadian tax pools plus the non-capital losses carried
forward exceed the book value of depreciable assets. PCS will begin to book a
deferred tax provision at the effective rate of 35 percent once the tax pools
plus the non-capital losses carried forward are less than the 

38

<PAGE>   44


book value of the assets. This rate assumes that primarily all Canadian 
profits for income tax purposes are resource profits eligible for the resource 
allowance and that an earned depletion claim of 25 percent on resource profits 
is available to the Company.

     The Company's subsidiaries which operate in the United States are subject
to US federal and state income taxes. By virtue of certain income tax deductions
available, these subsidiaries are not currently subject to regular cash income
taxes. However, they are subject to the Alternative Minimum Tax, which may be
carried forward indefinitely to be applied against regular income tax liability.
In addition, the Company is subject to United States withholding tax on certain
payments received from its US subsidiaries. For 1996, the tax rate was
approximately 24 percent, of which 14 percentage points represented deferred
income taxes, and 10 percentage points represented cash taxes.

Analysis of Financial Condition and Cash Flow

     Cash provided by operating activities for 1997 was $467.8 million (1996 -
$296.2 million). The increase in cash from operating activities of $171.6
million is primarily due to the contribution from the nitrogen operations.

     Cash used in investing activities was $1,215.4 million (1996 - $39.0
million). Of the $1,176.4 million difference, $1,048.3 million relates to the
acquisition of shares of Arcadian, $69.5 million relates to capital additions to
fixed assets at PCS Nitrogen, and $31.9 million relates to increased capital
spending in potash and phosphate operations.

     Cash provided by (used in) financing activities was $762.7 million (1996 -
$(304.0) million). The Company financed a portion of the Arcadian acquisition
and repayment of the Arcadian Senior Notes with additional long-term debt of
$810.0 million and short-term debt of $140.0 million. $300.0 million of the
long-term debt and a net $38.1 million of the short-term debt were repaid during
the period, as were $374.5 million of the Arcadian Senior Notes. The balance of
the Arcadian acquisition was financed through the issuance of 8,029,092 common
shares valued at $573.3 million. The Company paid dividends of $55.3 million
(1996 - $48.2 million).

RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

     The Company's nitrogen operations are significantly impacted by the price
of natural gas. The Company employs derivative commodity instruments related to
a portion of its natural gas requirements (primarily futures, swaps and options)
for the purpose of managing its exposure to commodity price risk in the purchase
of natural gas. Changes in the market value of these derivative instruments have
a high correlation to changes in the spot price of natural gas. Gains or losses
arising from settled hedging transactions are deferred as a component of
inventory until the product containing the hedged item is sold. Changes in the
market value of open hedging transactions are not recognized as they generally
relate to changes in the spot price of anticipated natural gas purchases. The
effect of the natural gas hedging program on cost of sales in 1997 was a
reduction of $1.8 million.

     A sensitivity analysis has been prepared to estimate the Company's market
risk exposure arising from derivative commodity instruments. The fair value of
such instruments is calculated by valuing each position using quoted market
prices. Market risk is estimated as the potential loss in fair value resulting
from a hypothetical 10 percent adverse change in such prices. The results of
this analysis indicate that as of December 31, 1997, the Company's derivative
commodity instruments market risk exposure was 

                                                                             
THE FOLLOWING TABLE SUMMARIZES CERTAIN OF THE COMPANY'S FINANCIAL RATIOS AS
CALCULATED FROM THE CONSOLIDATED FINANCIAL STATEMENTS:


<TABLE>
                                        YEAR ENDED DECEMBER 31
                                        1997              1996         % CHANGE
<S>                                     <C>               <C>          <C>
Quick Ratio                              .79              1.23          (35.8)
Current Ratio                           1.62              2.48          (34.7)
Shareholders' Equity to Total Assets     .50               .56          (10.7)
Return on Shareholders' Equity           13%               15%          (13.3)
Book Value per Share                  $41.34            $30.83           34.1
Asset Turnover                           53%               56%           (5.4)
Return on Investment                   8.55%            10.25%          (16.6)
Long-term Debt to Equity               .51:1             .44:1           15.9
</TABLE>

                                                                            39
<PAGE>   45


$22.5 million. Actual results may differ. Changes in the fair value of such 
derivative instruments, with maturities in 1998 through 2002, will generally 
relate to changes in the spot price of anticipated natural gas purchases.


     The Company also enters into forward foreign exchange contracts to manage
its exposure to exchange rate fluctuations relating to certain trade
liabilities. Gains or losses resulting from foreign exchange contracts are
recognized at the time that the contracts are entered into and are included in
other income.

ENVIRONMENTAL

     The Company is subject to various environmental laws and regulations
throughout the United States,  Canada, and Trinidad. Expenditures relating to
compliance with these environmental laws are considered to be part of the normal
course of business. Future laws and regulations or changes to existing laws and
their impact cannot be predicted. Capital expenditures in the environmental area
in 1997 totalled $15.4 million (1996 - $8.9 million) while $66.9 million (1996 -
$63.0 million) was incurred as environmental operating expense. Expenditures in
1998 are expected to be of a similar magnitude for existing operations.

YEAR 2000

     The Company began addressing Year 2000 issues in the early 1990s by
converting to four-digit date codes. It continues to review its administration
systems and, based on investigations to date, considers them to be Year 2000
compliant with minor exceptions that will be compliant once routine upgrades are
completed. It is reviewing its operational systems and communicating with
relevant third parties to address Year 2000 matters. It is utilizing internal
resources to identify, reprogram and test its systems for Year 2000 compliance
and anticipates that these efforts will be completed by first quarter 1999.
Costs over the next two years are not expected to have a material effect on the
Company's financial results.

OUTLOOK

     Certain statements in this annual report and this Management Discussion and
Analysis of Financial Condition and Results of Operations, including those in
this "Outlook" section relating to the period after December 31, 1997, are
forward-looking statements subject to uncertainties. A number of factors could
cause actual results to differ materially from those in the forward-looking
statements, including, but not limited to, fluctuation in supply and demand in
fertilizer markets, fluctuation in supply and demand in sulphur and
petrochemical markets, changes in capital markets, changes in currency exchange
rates, unexpected geological or environmental conditions, imprecision in reserve
estimates, and changes in government policy. The Company sells to a diverse
group of customers both by geography and by end product. Market conditions will
vary on a year-over-year basis and sales shift from one period to another.

     The rising world population and the demand for more food and better diets,
with meat as a protein source, will continue to drive consumption of fertilizers
over the long term. Over the short term, 



PCS DEBT TO CAPITAL RATIO

[GRAPH]

     Its phosphate and nitrogen acquisitions raised the Company's debt to
capital ratio, but it has continued to pay down debt and has lowered its ratio
each quarter.

40

<PAGE>   46


there should be increased fertilizer usage as world grain stocks are at 
historical lows, and governments around the world are focusing on increasing 
food production. While the consumption trend line is expected to continue 
to climb over the long term, there will be, at times, fluctuations in demand.

     North American fertilizer demand is generally considered mature but is
expected to fluctuate from year to year, as a function of acres planted and
application rates per acre which are influenced by crop prices and weather. US
farmers are projected to commit more than 150 million acres to corn and soybeans
in 1998. These crops are among the largest users of fertilizers. With the need
to replenish depleted nutrient levels in the soil from record or near-record
harvests in 1997 and the larger acreages for corn and soybeans, it is expected
that demand for fertilizer will remain strong.

     The Company sells a significant amount of potash and phosphate in the
offshore markets. To date, the currency devaluation in Far Eastern countries has
not significantly affected these sales. These countries purchase fertilizer to
grow cash crops for export and to grow food for internal use and are making
fertilizer purchases a priority in spending plans. However, the persistence of
the currency devaluation could affect the growth trend.

     The Company also sells products in the non-fertilizer markets which are
affected by domestic economic growth. The optimistic outlook for domestic
economic growth should translate into increased demand for these upgraded
products.

     The effect of such anticipated increase in demand for fertilizer and
non-fertilizer products will be offset to the degree that additional capacity,
particularly for nitrogen products, comes on stream.

     Potash is expected to continue to perform well in both the domestic and
offshore markets. The Company successfully introduced two successive price
increases in the domestic market in the fall of 1997 and has announced a further
price increase for the first quarter of 1998. Supply has tightened as a
competitor in New Brunswick has shut down due to mine flooding and another mine
in New Mexico has closed due to dwindling ore reserves. The PCS acquisition of
Potacan will provide greater flexibility in product sourcing and mix. In the
offshore market, 1998 is off to a good start. Canpotex shipped strong volumes,
at higher prices, to China during the first quarter. A contract agreement at
higher prices was reached with Japan.

     PCS continues to operate its potash mines by matching production to sales
demand. Shutdowns at potash mines for inventory correction will influence potash
production costs on a quarter-over-quarter comparative basis.

[PICTURE]

     Freed from government restrictions, US farmers are planting more acres and
applying more fertilizer - an estimated 20 million tonnes in 1996-97.

     The near-term outlook for phosphate prices is expected to remain steady as
supply and demand are in reasonably good balance. Worldwide phosphoric acid
capacity utilization remains at historically high levels. The outlook for liquid
phosphate fertilizer is positive from both a demand and a price perspective. As
two-thirds of US DAP is exported, a strong offshore market is required to
establish upward pressure on prices. Prospective sales to China, India and
Pakistan look favorable. However, as in the past, India's purchases will depend
on its subsidies. Mississippi Chemical has joined PhosChem, further
strengthening the association's offshore sales position. In North America,
projected increased acreage is expected to support liquid and solid phosphate
fertilizer sales.

     In the phosphate feed industry, forecasts of increased hog and poultry
production in 1998 bode well for improved demand.

     Market prices for nitrogen fertilizer are expected to continue under
pressure as new capacity comes on stream. It will be difficult for the Company
to realize its 1997 ten month gross margin in nitrogen in the full year of 1998.
The urea market is influenced by China. Early in 1997, China stopped importing
urea which had a negative effect on prices. Chinese buyers remained 

                                                                              41
<PAGE>   47
inactive through early 1998. China postponed plans for the construction of two 
urea plants. The UAN solutions market has been additionally affected by new 
capacity. Prices continue to be disappointing. As a result, PCS Nitrogen has 
cut nitrogen solutions production at its Wilmington plant. This plant is 
scheduled to cease production in the first half of 1998. Overall, the Company 
expects that its strategic plant locations (which generally result in higher 
margins), stable sales to industrial customers, and favorable gas contracts 
in Trinidad will continue to support nitrogen margins.

[GRAPH]

Source: USDA
China tripled its meat consumption between 1987 and 1997. In 10 years, its per
capita poultry and beef consumption increased sixfold while consumption of pork
doubled.

     The moderation of ammonia prices is expected to favorably affect phosphate
processing input costs on a year-over-year basis. PCS can use up to one-third of
the ammonia it produces and sells as ammonia at its own phosphate plants.
Modified mining methods at Aurora are expected to reduce rock costs.

     The Company manages its natural gas costs through a combination of fixed
price contracts, hedges and the Trinidad gas contracts. As the most flexible
producer, PCS will continue to allocate its nitrogen and phosphate feed stock to
production of the products with the best margins.

     Capital expenditures in 1998 are expected to be approximately the same as
those in 1997.

     Depreciation and amortization will be higher, in large part due to a full
year of nitrogen operations.

     On February 9, 1998, the government of the Province of Saskatchewan
announced a reduction of the top marginal rate of the profits portion of the
Potash Production Tax from 50 percent to 35 percent, effective January 1, 1998.

     The deferred income tax provision in 1998 will be higher as the Company has
fully utilized its additional Canadian tax deductions.

     The narrative included under this Management Discussion and Analysis has
been prepared with reference to the financial statements reported under
accounting principles generally accepted in Canada.



[PICTURE]



     Developing nations are coming to recognize that importing fertilizer to
improve yields of grains, fruits, vegetables and other crops often costs less
than importing food to feed their rising populations.
<PAGE>   48


SELECTED TEN-YEAR DATA

(For the Years Ended December 31)


<TABLE>
<CAPTION>
                       1997(5)     1996  1995(4)  1994(1)   1993(3)    1992   1991   1990  1989(2)   1988
<S>                    <C>         <C>   <C>      <C>       <C>        <C>    <C>    <C>   <C>       <C>
FINANCIAL DATA
(US$ Millions)
Net Sales             2,325.9   1,403.9    856.1   363.1     212.2    214.1  206.8  189.9    221.6  251.3
Operating Income        447.6     299.5    224.2    98.5      56.9     50.6   39.1   34.6     68.4   84.8
Net Income              297.1     209.0    159.5    91.2      44.7     39.8   31.3   17.3     57.7   74.8
Net Income per Share
(Actual Dollars)         5.68      4.59     3.68    2.12      1.13     1.03   0.81   0.47     1.65    --
Dividends per Share
(Actual Dollars)         1.03      1.06     1.06    0.77      0.53     0.51   0.51   0.51     0.13    --
Cash Provided by
Operating Activities    467.8     296.2    233.5    150.7     49.8     57.4   53.8   66.1     72.4   97.7
Working Capital         281.7     278.8    136.1    103.3     37.0     70.9   47.4   25.7     16.4  115.3
Total Assets          4,427.6   2,494.4  2,581.8  1,027.8  1,036.4    915.0  898.8  914.8    915.5  959.0
Total Long-Term Debt
and Long-Term
Obligations Under
Capital Lease         1,130.0     620.0    714.5      2.0     20.1     48.9   54.4   62.6     67.8   72.3
Shareholders' Equity  2,227.9   1,405.5  1,241.9    964.3    903.7    809.5  788.9  777.3    745.2  858.9
_________________________________________________________________________________________________________
OPERATING DATA
(Thousands)
EMPLOYEES AT YEAR-END
(Actual Numbers)        5,751     4,490    4,579    1,781    1,818    1,415  1,227  1,242    1,256  1,273
_________________________________________________________________________________________________________
POTASH PRODUCTION (KCl)
Tonnage                 6,483     5,782    6,071    5,298    3,902    3,850  4,030  3,464    4,257  5,089
_________________________________________________________________________________________________________
PHOSPHATE PRODUCTION
(P2O5) Tonnage          2,282     2,096    1,008      --       --       --     --     --       --     --
_________________________________________________________________________________________________________
NITROGEN PRODUCTION (N)
Tonnage                 2,349       --       --       --       --       --     --     --       --     --
_________________________________________________________________________________________________________
POTASH SALES - KCl
Tonnes                  6,640     5,612    5,848    5,569    3,795    3,737  3,909  3,725    4,018  4,728
_________________________________________________________________________________________________________
PHOSPHATE SALES -
Product Tonnes          4,434     4,305    2,206      --       --       --     --     --       --     --
_________________________________________________________________________________________________________
NITROGEN SALES -
Product Tonnes          6,038       535      115      --       --       --     --     --       --     --
_________________________________________________________________________________________________________
NET SALES
(US$ Millions)
POTASH                  504.2     403.2    421.0    363.1     212.2   214.1  206.8  189.9    221.6  251.3
PHOSPHATE               953.6     892.0    412.1      --        --      --     --     --       --     --
NITROGEN                868.1     108.7     23.0      --        --      --     --     --       --     --
_________________________________________________________________________________________________________
TOTAL NET SALES       2,325.9   1,403.9    856.1    363.1     212.2   214.1  206.8  189.9    221.6  251.3
_________________________________________________________________________________________________________
</TABLE>

(1)  The financial statements of the Company for 1994 and prior years have been
     restated to US currency in accordance with accounting principles generally
     accepted in Canada using the Translation of Convenience Method. The
     Canadian dollar amounts have been converted to US currency at the exchange
     rate of US$1.00 = CDN$1.4028.

(2)  In November 1989, the Company was privatized. Subsequent results reflect
     the privatization and associated reorganization.

(3)  Data for 1993 and thereafter reflect the acquisition of Potash Company of
     America assets on October 7, 1993.

(4)  Data for 1995 and thereafter reflect the acquisition of Texasgulf Inc. on
     April 10, 1995 and the acquisition of White Springs Agricultural Chemicals,
     Inc. on October 31, 1995.

(5)  Data for 1997 reflect the acquisition of Arcadian Corporation on March 6,
     1997.

<TABLE>
<CAPTION>
                                97 Q1     97 Q2    97 Q3    97 Q4    96 Q1     96 Q2    96 Q3    96 Q4
<S>                             <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>
QUARTERLY RESULTS (Thousands)
Potash Production - KCl Tonnes  1,653     1,687    1,297    1,846    1,699     1,512      755    1,816
Phosphate Production -
P2O5 Tonnes                       521       600      599      562      514       507      532      543
Nitrogen Production - N Tonnes    240       724      722      663     --        --       --       --
Net Sales ($)                 464,834   676,648  573,773  610,674  366,871   352,369  342,148  342,480
Operating Income ($)           90,513   154,714  108,851   93,562   87,122    74,366   66,418   71,586
Net Income ($)                 56,365    96,980   71,418   72,375   63,678    52,398   46,772   46,188
Net Income per Share
(Actual Dollars) ($)             1.18      1.81     1.33     1.35      1.40     1.15     1.03     1.01
______________________________________________________________________________________________________
</TABLE>

The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in Canada. These
principles differ in some respects from those applicable in the United States
(see Note 26 to the Company's consolidated financial statements).

NOTES TO SELECTED TEN-YEAR DATA AND QUARTERLY RESULTS:

1.   There were no extraordinary items nor were there any discontinued
     operations in any of the accounting periods.

2.   Fully diluted net income per share did not differ materially from net
     income per share in any of the accounting periods.

3.   Net income per share for each quarter has been computed based on the
     weighted average number of shares issued and outstanding during the
     respective quarter; therefore, quarterly amounts may not add to the annual
     total.
  

                                                                        43
<PAGE>   49


MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

     The accompanying consolidated financial statements and related financial
information are the responsibility of PCS management and have been prepared in
accordance with generally accepted accounting principles and include amounts
based on best estimates and judgments. Financial information included elsewhere
in this report is consistent with the consolidated financial statements.

     To meet management's responsibility for financial reporting and to obtain
reasonable assurance for the integrity and reliability of the financial reports,
the Company's accounting and internal control systems are designed to safeguard
assets and to properly record transactions and events. Policies and procedures
are maintained to support the accounting and internal control systems.

     Our independent auditors, Deloitte & Touche, provide an objective,
independent audit of the consolidated financial statements. Their report for
1997 is included.

     The Board of Directors, through the audit committee composed exclusively of
outside directors, meets regularly with the independent auditors and
representatives of management, including the Company's internal auditor - both
jointly and separately - to review significant accounting, reporting and
internal control matters. The audit committee also recommends to the Board the
external auditors to be proposed to the shareholders for appointment at the
annual meeting. Interim consolidated financial statements are reviewed by the
audit committee prior to release to shareholders.

     The consolidated financial statements are approved by the Board of
Directors on the recommendation of the audit committee.



[SIGNATURE]                     [SIGNATURE]
C. E. Childers                  B. E. Humphreys
Chairman, President and         Senior Vice President
Chief Executive Officer         Finance and Treasurer
February 12, 1998


AUDITORS' REPORT

TO THE SHAREHOLDERS OF POTASH CORPORATION OF SASKATCHEWAN INC.

     We have audited the consolidated statements of financial position of Potash
Corporation of Saskatchewan Inc. as at December 31, 1997 and 1996 and the
consolidated statements of income and retained earnings and of cash flow for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

     In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1996, and the results of its operations and the changes in its
financial position for each of the three years in the period ended December 31,
1997 in accordance with accounting principles generally accepted in Canada.




        Saskatoon, Saskatchewan             [SIGNATURE]
        February 12, 1998                   Chartered Accountants




44
<PAGE>   50


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT DECEMBER 31



<TABLE>
<CAPTION>
                                                            (in thousands of US dollars)
                                                                  1997              1996

----------------------------------------------------------------------------------------
<S>                                                         <C>               <C>
ASSETS
Current Assets
  Cash and cash equivalents                                 $    8,756        $       -
  Accounts receivable (Note 4)                                 351,154           230,778
  Inventories (Note 5)                                         353,425           219,433
  Prepaid expenses                                              21,131            16,748
----------------------------------------------------------------------------------------
                                                               734,466           466,959
Property, plant and equipment (Note 6)                       2,995,625         1,978,692
Goodwill (Note 7)                                              574,296             1,686
Other assets (Note 8)                                          123,205            47,050
----------------------------------------------------------------------------------------
                                                            $4,427,592        $2,494,387
========================================================================================

LIABILITIES
Current Liabilities
  Bank indebtedness (Note 9)                                $      -          $    6,330
  Short-term debt (Note 9)                                     101,928                -
  Accounts payable and accrued charges (Note 10)               348,103           180,008
  Current portion of long-term debt (Note 11)                    2,400             1,520
  Current obligations under capital leases (Note 12)               340               300
----------------------------------------------------------------------------------------
                                                               452,771           188,158
Long-term debt (Note 11)                                     1,129,141           618,800
Obligations under capital leases (Note 12)                         823             1,163
Deferred income tax liability (Note 19)                        338,431            28,480
Accrued post-retirement/post-employment benefits
(Note 13)                                                      123,418            95,460
Accrued reclamation costs (Note 14)                            139,105           146,512
Other non-current liabilities and deferred credits              16,012            10,318
----------------------------------------------------------------------------------------
                                                             2,199,701         1,088,891
----------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share Capital (Note 15)                                      1,211,049           630,484
Unlimited authorization of common shares; issued
  and outstanding 53,896,186 and 45,581,864 shares
  in 1997 and 1996, respectively
Contributed Surplus                                            336,486           336,486
Retained Earnings                                              680,356           438,526
----------------------------------------------------------------------------------------
                                                             2,227,891         1,405,496
----------------------------------------------------------------------------------------
                                                            $4,427,592        $2,494,387
========================================================================================
</TABLE>


(See Notes to the Consolidated Financial Statements)


Approved by the Board,

 
                       [SIGNATURE]                     [SIGNATURE]
                        Director                        Director




                                                                              45
<PAGE>   51


CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31



<TABLE>
<CAPTION>
                                                                             (in thousands of US dollars)
                                                            1997                1996                 1995
__________________________________________________________________________________________________________
<S>                                                   <C>                 <C>                    <C>
Net sales (Note 16)                                   $2,325,929          $1,403,868             $856,080
Cost of goods sold                                     1,740,758           1,019,894              549,185
__________________________________________________________________________________________________________
GROSS MARGIN                                             585,171             383,974              306,895
__________________________________________________________________________________________________________

Selling and administrative                                99,663              60,142               54,123
Provincial mining and other taxes (Note 17)               70,312              40,197               43,388
Other income                                             (32,444)            (15,857)             (14,865)
__________________________________________________________________________________________________________
                                                         137,531              84,482               82,646
__________________________________________________________________________________________________________
OPERATING INCOME                                         447,640             299,492              224,249
INTEREST EXPENSE (NOTE 18)                                81,439              46,761               41,817
__________________________________________________________________________________________________________
INCOME BEFORE INCOME TAXES                               366,201             252,731              182,432
INCOME TAXES (NOTE 19)                                    69,063              43,695               22,946
__________________________________________________________________________________________________________
NET INCOME                                               297,138             209,036              159,486
RETAINED EARNINGS, BEGINNING OF YEAR                     438,526             277,689              164,037
DIVIDENDS                                                (55,308)            (48,199)             (45,834)
__________________________________________________________________________________________________________
RETAINED EARNINGS, END OF YEAR                        $  680,356          $  438,526             $277,689
==========================================================================================================
NET INCOME PER SHARE (NOTE 20)                             $5.68               $4.59                $3.68
==========================================================================================================
DIVIDENDS PER SHARE                                        $1.03               $1.06                $1.06
==========================================================================================================
</TABLE>

(See Notes to the Consolidated Financial Statements)



46
<PAGE>   52


CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31


<TABLE>
<CAPTION>
                                                                          (in thousands of US dollars)
                                                                       1997         1996          1995
_______________________________________________________________________________________________________
<S>                                                             <C>           <C>           <C> 
OPERATING ACTIVITIES
Net income                                                      $   297,138   $  209,036    $  159,486
Items not affecting cash
  Depreciation and amortization                                     170,002       90,125        70,953
  (Gain) loss on disposal of fixed assets                            (4,739)       2,152           726
  Provision for deferred income tax                                  34,491       23,737         4,743
  Provision for post-retirement/
    post-employment benefits                                          6,166        5,890         2,052
_______________________________________________________________________________________________________
                                                                    503,058      330,940       237,960

CHANGES IN NON-CASH OPERATING WORKING CAPITAL
  Accounts receivable                                                23,470       (7,400)      (48,831)
  Inventories                                                        19,873        2,493         9,297
  Prepaid expenses                                                    3,736       (1,393)        4,299
  Accounts payable and accrued charges                              (68,623)     (19,214)       26,581
Accrued reclamation costs                                            (7,407)      (5,021)        5,214
Other non-current liabilities and deferred credits                   (6,286)      (4,219)       (1,037)
_______________________________________________________________________________________________________
CASH PROVIDED BY OPERATING ACTIVITIES                               467,821      296,186       233,483
_______________________________________________________________________________________________________

INVESTING ACTIVITIES
Additions to property, plant and equipment                         (160,337)     (58,939)      (39,596)
Acquisition of Texasgulf Inc.                                            -            -       (812,226)
Acquisition of White Springs Agricultural
  Chemicals, Inc.                                                        -            -       (291,540)
Acquisition of Arcadian Corporation (Note 3)                     (1,048,263)          -             -   
Proceeds from disposal of fixed assets                               15,276       22,716           503
Additions to other assets                                           (22,091)      (2,819)      (10,298)
_______________________________________________________________________________________________________
CASH USED IN INVESTING ACTIVITIES                                (1,215,415)     (39,042)   (1,153,157)
_______________________________________________________________________________________________________
CASH (DEFICIENCY) BEFORE FINANCING ACTIVITIES                      (747,594)     257,144      (919,674)
_______________________________________________________________________________________________________

FINANCING ACTIVITIES
Proceeds from (repayment of) long-term obligations                  510,021     (258,556)      825,540
Proceeds from short-term debt                                       101,928           -             -
Repayment of Senior Notes                                          (374,526)          -             -
Dividends                                                           (55,308)     (48,199)      (45,834)
Issuance of shares                                                  580,565        2,784       163,889
_______________________________________________________________________________________________________
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                     762,680     (303,971)      943,595
_______________________________________________________________________________________________________

INCREASE (DECREASE) IN CASH                                          15,086      (46,827)       23,921
(BANK INDEBTEDNESS) CASH AND CASH
  EQUIVALENTS, BEGINNING OF YEAR                                     (6,330)      40,497        16,576
_______________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS),
 END OF YEAR                                                    $     8,756   $   (6,330)  $    40,497
=======================================================================================================
Supplemental cash flow disclosure
  Interest paid                                                 $    85,926   $   42,901   $    38,836
  Income taxes paid                                             $    41,252   $   32,914   $     6,242
_______________________________________________________________________________________________________ 
</TABLE>

(See Notes to the Consolidated Financial Statements)

                                                                           47
<PAGE>   53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


1. DESCRIPTION OF BUSINESS

     Potash Corporation of Saskatchewan Inc. (PCS) and its operating
subsidiaries (the "Company" except to the extent the context otherwise requires)
form an integrated fertilizer and related industrial and feed products company.
The Company's potash producing assets include five mines and mills and mining
rights to potash reserves at a sixth location all in the Province of
Saskatchewan, one mine and two mills located in the Province of New Brunswick
and one mine and mill in the State of Utah. The Company's phosphate producing
assets include a vertically-integrated phosphate mine and processing plant
located in the State of North Carolina, phosphate feed plants in six states, two
industrial phosphoric acid plants owned in a joint venture carrying on business
as Albright & Wilson Company, a mine and processing plant complexes in the State
of Florida and a processing plant complex in the State of Louisiana. The
Company's nitrogen producing assets include seven domestic plants located in the
states of Georgia, Iowa, Louisiana, Nebraska, Ohio, North Carolina and Tennessee
and large scale operations in Trinidad. The Company owns or leases in excess of
130 terminal and warehouse facilities strategically located in Canada and the
United States, and services customers with a fleet of approximately 5,200
railcars.

     The Company sells potash from its Saskatchewan mines for use outside North
America exclusively to Canpotex Limited ("Canpotex"). Canpotex, a potash export,
sales and marketing company owned in equal shares by the three potash producers
in the Province of Saskatchewan (including the Company), resells potash to
offshore customers. PCS Sales (Canada) Inc. and PCS Sales (USA), Inc.,
wholly-owned subsidiaries of PCS, execute marketing and sales for the Company's
potash, phosphate and nitrogen products in North America. PCS Sales (Canada)
Inc. executes offshore marketing and sales for the Company's New Brunswick
potash. PCS Sales (USA), Inc. executes offshore marketing and sales for the
Company's nitrogen products. Phosphate Chemicals Export Association, Inc.
("PhosChem"), a phosphate export association established under United States
law, is the principal vehicle through which the Company executes offshore
marketing and sales for its phosphate fertilizers.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The Company's accounting policies are in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). These policies are
consistent with accounting principles generally accepted in the United States in
all material respects except as outlined in Note 26. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The following policies are considered to be significant:

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of PCS and its
operating subsidiaries:

- PCS Sales (Canada) Inc.
     - PCS Sales (Iowa), Inc.
     - PCS Sales (Indiana), Inc.
     - Potash Corporation of Saskatchewan (Florida) Inc.
     (PCS Florida)
- PCS Sales (USA), Inc.
- Potash Corporation of Saskatchewan Transport Limited
     (PCS Transport)

- PCS Phosphate Company, Inc. (PCS Phosphate)
     - Albright & Wilson Company (proportionately consolidated) 
     - White Springs Agricultural Chemicals, Inc. (White Springs) 
     - PCS Nitrogen, Inc. (PCS Nitrogen)

     All significant intercompany balances and transactions have been
eliminated.

CASH EQUIVALENTS

     Highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents.

INVENTORIES

     Inventories of finished product, raw materials and work in process are
valued at the lower of cost and net realizable value. Cost for substantially all
finished product, raw materials and work in process inventories is determined
using the first in, first out (FIFO) method. Certain inventories of materials
and supplies are valued at the lower of average cost and replacement cost and
certain inventories of materials and supplies are valued at the lower of cost
and market.

PREPAID EXPENSES

     Prepaid expenses include prepaid freight which relates to product inventory
stored at warehouse and terminal facilities which is invoiced to customers at
the time of sale of the inventory.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment (which includes mine development costs) are
carried at cost, except for mineral properties, which are carried at the lower
of cost or fair value. Costs of additions, betterments and renewals are
capitalized. The Company periodically reviews property, plant and equipment for
indicators of potential impairment. Impairment would be measured by comparing
book value against the estimated undiscounted future cash flows and any such
impairment loss would be included in the statement of income.

     Maintenance and repair expenditures which do not improve or extend
productive life are expensed as incurred.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization are provided for on a basis and at rates
calculated to amortize the cost of the fixed assets over their estimated useful
lives. Depreciation and amortization rates for all mine assets (including mine
development costs) and potash mills are determined using the units of production
method based on estimates of proven and probable reserves. Other asset classes
are depreciated or amortized on a straight-line basis as follows: land
improvements 5 to 30 years, buildings and improvements 6 to 30 years and
machinery and equipment 5 to 25 years.

GOODWILL

     Goodwill represents the excess of the purchase price and related costs over
the value assigned to the net tangible assets of businesses acquired.
Substantially all of the goodwill relates to the acquisition of Arcadian
Corporation (see Note 3). Goodwill is being amortized on a straight-line basis
over a period of forty years. The Company assesses the recoverability of this
intangible asset based on estimated undiscounted future cash flows.

OTHER ASSETS

     Issue costs of long-term obligations are capitalized to deferred charges
and are amortized to interest expense over the term of the related liability.



48
<PAGE>   54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Preproduction costs are capitalized to deferred charges and represent costs
incurred prior to obtaining commercial production at new milling facilities, net
of revenue earned, and are amortized on a straight-line basis over ten years.

     The costs of constructing bases for gypsum stacks and settling ponds are
capitalized to deferred charges and are amortized on a straight-line basis over
their estimated useful lives of three to five years.

     Land held for sale is stated at the lower of cost or net realizable value.

     Investments in which the company exercises significant influence (but does
not control) are accounted for using the equity method. Other investments are
stated at cost.

     Rotational plant maintenance costs, which consist primarily of planned
major maintenance projects (also known as "turnarounds"), are capitalized when
incurred and are amortized over the anticipated periods until the next scheduled
rotational plant maintenance which ranges from two to four years.

LEASES

     Leases entered into are classified as either capital or operating leases.
Leases that transfer substantially all of the benefits and risks of ownership of
property to the Company are accounted for as capital leases. At the time a
capital lease is entered into, an asset is recorded together with the related
long-term obligation. Equipment acquired under capital leases is being
depreciated on the same basis as other fixed assets. Gains or losses resulting
from sale-leaseback transactions are deferred and amortized in proportion to the
amortization of the leased asset. Rental payments under operating leases are
charged to expense as incurred.

POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS

     Accrual of the costs of the Company's defined benefit pension plans are
recorded monthly and adjusted annually based on actuaries' reports. Pension
expense includes the net of management's best estimate of the cost of benefits
provided, interest cost of projected benefits, return on pension plan assets and
amortization of experience gains or losses and plan amendments. Adjustments
arising from plan amendments, experience gains or losses and changes in
assumptions are amortized on a straight-line basis over the expected average
remaining service life of the employee group covered by the plan. Pension fund
assets are valued at market values.

     Accrual of the costs of providing certain post-retirement benefits,
including medical and life insurance coverage, during the active service period
of the employee is recorded monthly and adjusted annually as actuaries' reports
become available.

     Accrual during periods of active employment, for the expected cost of
certain benefits payable to former or inactive employees, is also recorded
monthly and adjusted annually. These benefits include long-term disability
income payments and related medical and insurance costs.

ENVIRONMENTAL COSTS

     Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Reserves for estimated costs are recorded when
environmental remedial efforts are likely and the costs can be reasonably
estimated. In determining the reserves, the Company uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.

FOREIGN EXCHANGE TRANSACTIONS

     PCS and its operating subsidiaries have the US dollar as their functional
currency.

     Canadian dollar operating transactions are translated to United States
dollars at the average exchange rate of the previous month. Trinidadian dollar
operating transactions are translated to United States dollars at the average
exchange rate for the period. Monetary assets and liabilities are translated at
period end exchange rates. Non-monetary assets owned at December 31, 1994 have
been translated under the Translation of Convenience Method at the December 31,
1994 year-end exchange rate of US $1.00 = CDN$1.4028. Additions subsequent to
December 31, 1994 are translated at the exchange rate prevailing at the time of
the transaction.

     Foreign exchange gains or losses are included in other income.

FINANCIAL INSTRUMENTS

     The Company enters into forward exchange contracts and natural gas futures,
swaps and option agreements to manage its exposure to exchange rate and
commodity price fluctuations. These activities have been designated as hedging
activities by the Company.

     Gains or losses on foreign currency exchange contracts are recognized at
the time that the contracts are entered into and are included in other income.

     Gains or losses resulting from changes in the fair value of natural gas
hedging transactions which have not yet been settled are not recognized as they
generally relate to changes in the spot price of anticipated natural gas
purchases. Gains or losses arising from settled hedging transactions are
deferred as a component of inventory until the product containing the hedged
item is sold, at which time both the natural gas purchase cost and the related
hedging deferral are recorded as cost of sales.

     The Company regularly evaluates its unrecognized or deferred gains and
losses on these derivatives from a net realizable value of inventory perspective
and establishes appropriate reserves, if necessary.

REVENUE RECOGNITION

     Sales revenue is recognized when the product is shipped or a service is
performed. Revenue is recorded based on the F.O.B. mine, plant, warehouse or
terminal price. Transportation costs are recovered from the customer through
sales pricing.

3. ACQUISITION OF ARCADIAN CORPORATION

     On March 6, 1997, the Company acquired all of the outstanding shares of
Arcadian Corporation for cash of $563,550 and the issuance of 8,029,092 common
shares valued at $573,278. The cash consideration was financed by debt. Arcadian
Corporation, based in Memphis, Tennessee, was a producer of nitrogen, nitrogen
products and certain phosphate products. The acquisition was completed through
the merger of Arcadian Corporation into a wholly-owned subsidiary of PCS, PCS
Nitrogen.

     The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of PCS Nitrogen have been included
in the consolidated financial statements from March 7, 1997. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
$584,848 has been recorded as goodwill and is being amortized on a straight-line
basis over 40 years. Liabilities assumed and included in the acquisition cost
include an accrual for integration costs (including relocation, outplacement and
termination costs) in the amount of $50,928.

                                                                             49

<PAGE>   55
3. ACQUISITION OF ARCADIAN CORPORATION (CONTINUED)

Net assets acquired were:


<TABLE>
<CAPTION>
<S>                                                   <C>
Working capital                                       $1,167,703
Fixed assets and other assets                          1,067,828
Goodwill                                                 584,848
________________________________________________________________
                                                       1,820,379
Long-term debt and other long-term liabilities           683,551
________________________________________________________________
Net assets acquired                                    1,136,828
Less: Cash acquired                                       88,565
________________________________________________________________
Net acquisition cost                                  $1,048,263
================================================================
</TABLE>

     The following unaudited pro forma financial information presents the
combined results of operations of the Company and PCS Nitrogen as if the
acquisition had occurred at the beginning of the years presented, after giving
effect to certain adjustments including amortization of goodwill, additional
depreciation expense, increased interest expense on debt related to the
acquisition, decreased interest expense and interest income due to debt retired
in connection with the acquisition, and related income tax effects.

     The unaudited pro forma financial information is for informational purposes
only and is not necessarily indicative of the future results of operations of
the combined company or the results of operations that would have actually
occurred had the acquisition been in effect for the years presented.

<TABLE>
<CAPTION>
                                                 1997            1996
_____________________________________________________________________
                                              (unaudited proforma)
<S>                                         <C>            <C>
Net sales                                  $2,487,985      $2,607,328
Operating income                              477,769         580,672
Net income                                    312,432         353,687
Net income per share                             5.82            6.60
</TABLE>

4. ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                  1997            1996
______________________________________________________________________
<S>                                         <C>             <C>
Trade accounts - Canpotex                   $1,143,097      $1,134,550
               - Other                         283,485         178,712
Non-trade accounts                              31,429          21,673
______________________________________________________________________
                                               358,011         234,935
Less allowance for doubtful accounts             6,857           4,157
______________________________________________________________________
                                            $1,351,154      $1,230,778
======================================================================
</TABLE>

5. INVENTORIES


<TABLE>
<CAPTION>
                                                  1997            1996
______________________________________________________________________
<S>                                         <C>               <C>
Finished product                            $1,162,181        $193,717
Materials and supplies                         107,518          73,912
Raw materials                                   59,689          29,917
Work in process                                 24,037          21,887
______________________________________________________________________
                                            $  353,425        $219,433
======================================================================

</TABLE>

6. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                        1997
_________________________________________________________________________________
                                                     ACCUMULATED
                                                  DEPRECIATION AND       NET BOOK
                                     COST           AMORTIZATION          VALUE
_________________________________________________________________________________

<S>                               <C>                  <C>             <C>
Land and improvements               $196,004            $20,697          $175,307
Buildings and improvements           421,617            102,494           319,123
Machinery and equipment            2,914,119            501,228         2,412,891
Mine development costs               125,908             37,604            88,304
_________________________________________________________________________________
                                  $3,657,648           $662,023        $2,995,625
=================================================================================

</TABLE>

<TABLE>
<CAPTION>
                                                        1996
_________________________________________________________________________________
                                                     Accumulated
                                                  Depreciation and       Net Book
                                     Cost           Amortization          Value
_________________________________________________________________________________
<S>                               <C>                 <C>              <C>
Land and improvements               $204,081            $17,662          $186,419
Buildings and improvements           424,368             92,156           332,212
Machinery and equipment            1,753,017            383,987         1,369,030
Mine development costs               125,908             34,877            91,031
_________________________________________________________________________________
                                  $2,507,374           $528,682        $1,978,692
=================================================================================
</TABLE>

7. GOODWILL

<TABLE>
<CAPTION>
                                                1997            1996
____________________________________________________________________
<S>                                         <C>               <C>
Cost                                        $586,987          $2,139
Accumulated amortization                      12,691             453
____________________________________________________________________
                                            $574,296          $1,686
====================================================================
</TABLE>

8. OTHER ASSETS

<TABLE>
<CAPTION>
                                                1997             1996
_____________________________________________________________________
<S>                                         <C>               <C>
Deferred charges - net of
  accumulated amortization                   $32,080          $22,451
Prepaid pension costs                         13,143            9,407
Land held for sale                             9,435            9,446
Investments                                   28,041            4,254
Rotational plant maintenance costs -
  net of accumulated amortization             36,137               -
Other                                          4,369            1,492
_____________________________________________________________________
                                            $123,205          $47,050
=====================================================================
</TABLE>

9. BANK INDEBTEDNESS AND SHORT-TERM DEBT

     Bank indebtedness consists of cheques issued in excess of funds on deposit.

     Short-term debt was $101,928 at December 31, 1997 (1996 - $0). The Company
has remaining available lines of credit for short-term financing in the amount
of $205,000 at December 31, 1997 (1996 - $95,000). The lines of credit are
unsecured.

10. ACCOUNTS PAYABLE AND ACCRUED CHARGES

<TABLE>
<CAPTION>
                                              1997             1996
_____________________________________________________________________
<S>                                         <C>              <C>
Trade accounts                              $264,679         $151,723
Accrued interest                               3,927            6,853
Accrued payroll                               17,561            9,015
Accrued integration                           44,534               -
Income taxes                                   3,778              395
Dividends                                     13,624           12,022
_____________________________________________________________________
                                            $348,103         $180,008
=====================================================================

</TABLE>

50
<PAGE>   56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


11. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                              1997            1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>               <C>
SYNDICATED FACILITIES LED BY THE BANK OF NOVA SCOTIA                                    $  685,000        $  575,000

     The Credit Facility provides for aggregate unsecured advances of $1.125
     billion at an interest rate of LIBOR plus a maximum of 0.75% (actual at
     December 31, 1997 was 0.30%) or Base Rate Canada Loans payable throughout
     the term of the Credit Facility. The Facility is renewable every 364 days
     with the consent of the lenders. No principal payments are required during
     the revolving period. If the Credit Facility is not renewed it converts to
     a five-year term facility repayable in twenty quarterly instalments each
     equal to 1% of the principal outstanding on the conversion date and a final
     payment of the remaining principal amount due on the fifth anniversary of
     the conversion date. The average interest rate on this obligation was 5.96%
     in 1997 (1996 - 5.88%).

INDUSTRIAL REVENUE AND POLLUTION CONTROL OBLIGATIONS                                        45,641          45,320

     Adjustable Rate Industrial Revenue and Pollution Control Obligations with
     varying interest rates and with maturity dates ranging from 1998 to 2012.
     No sinking fund requirements prior to maturity. The Adjustable Rate
     Industrial Revenue and Pollution Control Obligations bear interest at rates
     ranging from 3.75% to 4.30%. The average interest rate on these obligations
     was 3.92% in 1997 (1996 - 3.98%). These loans are secured by bank letters
     of credit, most of which are guaranteed by the Company.

NOTES PAYABLE                                                                              400,000               -

     7.125% notes payable June 15, 2007. No sinking fund requirements prior to
     maturity. These notes were issued under a shelf registration covering up to
     $1,000,000 of debt securities. The notes are unsecured.


SENIOR NOTES                                                                                   900               -

     The Senior Notes are redeemable beginning May 1, 1998. 
------------------------------------------------------------------------------------------------------------------
                                                                                         1,131,541         620,320
Less current maturities                                                                      2,400           1,520
------------------------------------------------------------------------------------------------------------------
                                                                                        $1,129,141        $618,800 
==================================================================================================================
</TABLE>

     The fair values of all long-term obligations are approximated by their face
     values.

     Assuming that the Credit Facility will continue to be renewed, long-term
debt at December 31, 1997 will mature as follows:


<TABLE>
                    <S>                         <C>
                    1998                        $    2,400
                    1999                             1,200
                    2000                             7,000
                    2001                                 -
                    2002                               222
                    Subsequent years             1,120,719
                    --------------------------------------
                                                $1,131,541
                    ======================================
</TABLE>

12. COMMITMENTS

LEASE COMMITMENTS

     The Company has long-term lease agreements for buildings, port facilities,
certain ammonia plants in Trinidad, equipment, ocean-going transportation
vessels and rail cars (excluding mineral leases), the latest of which expires in
2017.

     The Company has lease agreements with unaffiliated entities with respect to
two ammonia plants constructed in Trinidad. The minimum annual lease payments
under these agreements are approximately $23,000. The initial terms of the
leases (five years and seven years) are renewable for additional five year terms
subject to certain conditions. If the leases are not renewed or are otherwise
terminated, the Company may be required to make residual termination payments of
approximately 85% of the estimated $374,000 costs of construction. The Company
has an option to purchase the plants during the terms of the leases for prices
approximating their fair market values at the date of exercise.

     Future minimum lease payments under these capital and operating leases will
be approximately as follows:

<TABLE>
<CAPTION>
<S>                                               <C>             <C>
                                                   Operating       Capital
--------------------------------------------------------------------------
1998                                              $   75,760      $    468
1999                                                  73,688           468
2000                                                  69,636           467
2001                                                  55,599             -
2002                                                  49,503             -
Subsequent years                                     156,070             -
--------------------------------------------------------------------------
                                                                     1,403
Less amount representing interest                                      240
--------------------------------------------------------------------------
Present value of minimum capital lease payments                      1,163




Current portion                                                        340
--------------------------------------------------------------------------
Long-term portion                                                 $    823
==========================================================================
</TABLE>


     Rental expense for operating leases for the years ended December 31, 1997,
1996 and 1995 was $65,252, $29,350 and $11,437, respectively.

OTHER COMMITMENTS

     The Company has entered into raw material purchase commitments based upon
market rates at the time of delivery through 2007 in the amount of approximately
$150,898.

     The Company has entered into an agreement for the construction of a ship to
be delivered in 1999 for ocean-going transportation of raw materials and
finished products in the amount of $37,000. Progress payments of $22,200 are
required in 1998.




                                                                              51
<PAGE>   57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


12. COMMITMENTS (CONTINUED)

     On December 23, 1997, the Company signed a letter of intent to purchase all
of the outstanding shares of Potash Company of Canada Limited for cash of
CDN$18.8 million (subject to adjustment).

     BP Chemicals Inc. ("BPC") operates the Lima plant on behalf of the Company
pursuant to a contract providing for the reimbursement of expenses incurred by
BPC in providing such operating services.

     The Company's Trinidad operations have entered into long-term natural gas
contracts with a gas company in Trinidad. The contracts provide for prices which
vary with ammonia market prices, escalating floor prices and minimum purchase
quantities.

13. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS

CANADA

     Substantially all employees of the Company are participants in either a
defined contribution or a defined benefit pension plan. The Company's
obligations under the defined contribution plans are limited to making regular
payments to the plan to match contributions made by the employees for current
services (to a maximum of 5.5% of salary). Based on the latest actuarial
valuations of the defined benefit pension plans conducted at December 31, 1994,
and extrapolated to December 31, 1997, accrued pension benefits were $9,607 and
the market values of the assets of the plans were $9,368.

     The Company has established a supplemental retirement income plan for
senior management which is unfunded and non-contributory and provides a
supplementary pension benefit. The plan is provided for by charges to earnings
sufficient to meet the projected benefit obligation.

UNITED STATES

     The Company has contributory and defined benefit pension plans that cover a
substantial majority of its employees. Benefits are based on a combination of
years of service and compensation levels, depending on the plan. Generally,
contributions to the US plans are made to meet minimum funding requirements of
the Employee Retirement Income Security Act of 1974 (ERISA).

     The components of net pension expense for the Company's US pension plans,
computed actuarially, were as follows:


<TABLE>
<CAPTION>
                                                       1997       1996       1995
---------------------------------------------------------------------------------
<S>                                               <C>         <C>        <C>
Service cost for benefits earned
  during the year                                  $  9,446   $  7,337   $  2,584
Interest cost on projected
  benefit obligations                                18,844     15,351      9,021
Return on plan assets                               (23,624)   (35,551)   (26,048)
Net amortization and deferral                            31     16,875     16,044
---------------------------------------------------------------------------------
Net pension expense                                $  4,697   $  4,012   $  1,601
=================================================================================
</TABLE>

     Assets of both US funded plans consist mainly of corporate equity, US
government and corporate debt securities and units of participation in a
collective short-term investment fund.

     The funding status of the Company's US pension plans and amounts recognized
in the Consolidated Statements of Financial Position was as follows:

<TABLE>
<CAPTION>
                                                                                1997         1996
-------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
Plans' assets at fair value                                                 $316,125     $238,531
-------------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligations:
  Vested benefits                                                            223,255      169,513
  Non-vested benefits                                                         16,101       11,294
-------------------------------------------------------------------------------------------------
Accumulated benefit obligations                                              239,356      180,807
Excess projected benefit obligations  
  over accumulated benefit obligations                                        57,662       40,327
-------------------------------------------------------------------------------------------------
Total projected benefit obligations                                          297,018      221,134
-------------------------------------------------------------------------------------------------
Plans' assets exceeding projected 
  benefit obligations                                                         19,107       17,397
Items not yet recognized in earnings:
  Additional minimum liability                                                  (311)          -
  Unrecognized net gain                                                      (24,855)     (10,722)
  Unrecognized prior service cost                                              3,245          432
-------------------------------------------------------------------------------------------------
Net (accrual) prepaid pension cost                                            (2,814)       7,107
White Springs accrued liability                                                   -         2,300
(Accrual) prepaid pension cost                                             $  (2,814)    $  9,407
=================================================================================================
</TABLE>


     Significant actuarial assumptions for the Company's US funded plans were as
follows:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)



<TABLE>
<CAPTION>
                                                                       1997       1996        1995
--------------------------------------------------------------------------------------------------
<S>                                                                   <C>        <C>         <C>
Discount rate                                                         7.50%      7.50%       7.25%
Long-term rate of return
  on assets                                                           9.00%      9.00%       9.00%
Rate of increase in
  compensation levels                                                 5.00%      5.00%       5.00%
</TABLE>


TRINIDAD

     The Company has contributory defined benefit pension plans that cover a
substantial majority of its employees. Benefits are based primarily on future
service, with past service counting for purposes of vesting and eligibility for
benefits.

     The components of net pension expense for the Company's Trinidad pension
plans, computed actuarially, were as follows:

<TABLE>
<CAPTION>
                                                                                       1997
-------------------------------------------------------------------------------------------
<S>                                                                                 <C>
Service cost for benefits earned during the year                                    $   381
Interest cost on projected benefit obligations                                          722
Return on plan assets                                                                (1,610)
-------------------------------------------------------------------------------------------
Net pension expense                                                                 $  (507)
===========================================================================================
</TABLE>

     The plans' assets consist mainly of local government and other bonds, local
mortgage and mortgage-backed securities, fixed income deposits and cash.

     The funding status of the plans and amounts recognized in the Consolidated
Statements of Financial Position was as follows:


<TABLE>
<CAPTION>
                                                                                       1997
-------------------------------------------------------------------------------------------
<S>                                                                                <C>
Plans' assets at fair value                                                         $20,839
-------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligations:
 Vested benefits                                                                      5,376
 Non-vested benefits                                                                      6
-------------------------------------------------------------------------------------------
Accumulated benefit obligations                                                       5,382
Excess projected benefit obligations over accumulated
 benefit obligations                                                                  4,547
-------------------------------------------------------------------------------------------
Total projected benefit obligations                                                   9,929
-------------------------------------------------------------------------------------------
Plans' assets exceeding projected benefit obligations                                10,910
Item not yet recognized in earnings:
 Unrecognized net gain                                                               (1,361)
-------------------------------------------------------------------------------------------
Net prepaid pension cost                                                              9,549
Valuation allowance                                                                  (3,944)
-------------------------------------------------------------------------------------------
Prepaid pension cost                                                                $ 5,605
===========================================================================================
</TABLE>




52



<PAGE>   58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)

13. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (CONTINUED)

     Significant actuarial assumptions for the plans were as follows:


<TABLE>
<S>                                                                  <C>
Discount rate                                                        8.50%
Long-term rate of return on assets                                   9.50%
Rate of increase in compensation levels                              7.00%
</TABLE>

OTHER POST-RETIREMENT PLANS

     The Company provides certain health care and life insurance benefits for
retired employees. These plans are either contributory or non-contributory and
contain certain cost-sharing features such as deductibles and coinsurance. These
plans are unfunded and benefits are subject to change.

     Although the Company prepares its financial statements under Canadian GAAP,
it has continued to apply the treatment prescribed by SFAS No. 106 under US GAAP
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement requires the accrual of the cost of providing other post-retirement
benefits, including medical and life insurance coverage, during the active
service period of the employee.

     The components of this expense were as follows:

<TABLE>
<CAPTION>
                                                         1997           1996           1995
-------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>            <C>
Service cost                                          $ 2,701         $2,233         $1,017
Interest cost                                           7,816          6,710          3,999
Net amortization and deferral                              -             (11)           373
-------------------------------------------------------------------------------------------
Net cost                                              $10,517         $8,932         $5,389
===========================================================================================
</TABLE>

     The significant assumptions used in determining post-retirement benefit
cost were as follows:

<TABLE>
<S>                                                    <C>            <C>            <C>
Discount rate                                           7.50%          7.50%          7.25%
Health care trend rate                                 10.80%*        11.60%         12.50%
</TABLE>

* Decreasing gradually to 6.00% in 2003 and thereafter.

     If the health care cost trend rate was increased by 1.0 percent, the
accumulated post-retirement benefit obligation and the aggregate of service and
interest cost would have increased as follows:


<TABLE>
<CAPTION>
                                                         1997           1996           1995
-------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>           <C> 
Accumulated post-retirement
  benefit obligation                                   $4,722           $843         $2,650
Aggregate of service and
  interest cost                                           490             77            337
</TABLE>

     The Company has applied Canadian GAAP to prepare its financial statements
but continues to apply SFAS No. 112 under US GAAP "Employers' Accounting for
Postemployment Benefits." This statement requires the Company to accrue, during
periods of active employment, the expected cost of certain benefits payable to
former or inactive employees. These benefits include long-term disability income
payments and related medical and insurance costs.

     The effect of these costs on income before income taxes was $887, $486 and
$332 for 1997, 1996 and 1995, respectively. As at December 31, 1997, the Company
has a recorded liability for these costs of $1,873 (1996 - $2,138).

     The components of the Company's post-retirement/post-employment benefits
liability are as follows:

<TABLE>
<CAPTION>
                                                                        1997           1996
-------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C> 
Retirees                                                            $ 45,483        $39,681
Active:
  Fully eligible                                                      27,496         20,052
  Not fully eligible                                                  54,226         36,778
-------------------------------------------------------------------------------------------
Total                                                                127,205         96,511
Unrecognized net (loss) gain                                          (2,130)           341
-------------------------------------------------------------------------------------------
                                                                     125,075         96,852
Less current portion of SFAS 106                                      (3,530)        (3,530)
Add SFAS 112 liability                                                 1,873          2,138
-------------------------------------------------------------------------------------------
Accrued post-retirement/post-
  employment benefits liability                                     $123,418        $95,460
===========================================================================================
</TABLE>

     All of the Company's US employees may participate in defined contribution

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


savings plans. These plans are subject to US federal tax limitations and provide
for voluntary employee salary reduction contributions of up to 15 percent of
salary and Company matching contributions of up to 5 percent of salary. The
Company's matching contributions were $3,647 and $3,565 for 1997 and 1996,
respectively.

14. ENVIRONMENTAL COSTS

RECLAMATION AND RESTORATION COSTS

     Site restoration and reclamation costs have been accrued for various sites.
At December 31, 1997, the Company has accrued $31,953 (1996 - $35,856) for the
Aurora, North Carolina facility, $66,810 (1996 - $66,669) for the White Springs,
Florida facility, $27,377 (1996 - $27,377)  for the Moab, Utah facility and
$12,965 (1996 - $16,610) for various sulphur facilities. The idle sulphur
facilities were part of the acquisition of Texasgulf Inc. and are undergoing
dismantlement and environmental restoration efforts. The current portion of
restoration and reclamation accrued in 1997 totalled $3,675 (1996 - $4,511).
These amounts represent the Company's current estimate of potential site
restoration and reclamation costs which were last assessed in November 1996.
These expenditures are generally incurred over an extended period of time.

     Annual environmental expenditures for reclamation and restoration during
the years ended December 31, 1997, 1996 and 1995 were $66,972, $69,905 and
$32,971, respectively. Of the 1997 amount, $51,421 (1996 - $53,507; 1995 -
$28,296) was charged to operations, $4,948 (1996 - $6,787) was capitalized and
$10,603 (1996 - $9,611) was charged against accrued reclamation costs.

     Certain reclamation obligations are currently secured by a surety bond of
approximately $13,000.

CAPPING OF BYPRODUCT GYPSUM STACKS

     In 1993, the State of Florida passed certain legislation requiring
companies to reduce the potential environmental hazards associated with
accumulations of byproduct gypsum (gypsum stacks). The legislation requires
companies to "cap" the gypsum stacks in order to reduce seepage into the
groundwater. The procedures are not required until the gypsum stacks are no
longer in use, which management currently estimates to be no earlier than the
year 2010. At December 31, 1997, a balance of $35,350 (1996 - $34,285) was
included in accrued reclamation costs for this gypsum stack capping requirement.
The obligation of White Springs regarding the gypsum stacks is guaranteed by
PCS.

     In North Carolina, on expiry of the mine's phosphate reserves, capping of
the remaining gypsum stack must comply with the laws in place at that time.


                                                                          53
<PAGE>   59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)

14. ENVIRONMENTAL COSTS (CONTINUED)

OTHER ENVIRONMENTAL COSTS

Other than reclamation and restoration and gypsum stack capping costs discussed
above, no significant costs relating to existing conditions caused by past
operations were incurred by the Company during 1997. At December 31, 1997,
environmental reserves recorded by the Company, other than those related to
reclamation and restoration and gypsum stack capping, as discussed above, were
approximately $2,000.

The Company's estimated operating expenses, other than reclamation and
restoration and gypsum stack capping, relating to compliance with environmental
laws and regulations governing ongoing operations were approximately $15,520
for the year ended December 31, 1997 (1996 - $9,533; 1995 - $8,598). In
addition, capital expenditures for environmental compliance were approximately
$10,464 for the year ended December 31, 1997 (1996 - $2,123).

15. SHARE CAPITAL

AUTHORIZED:

The Company is authorized to issue an unlimited number of common shares without
par value and an unlimited number of first preferred shares. The first
preferred shares may be issued in one or more series with rights and conditions
to be determined by the Board of Directors.

<TABLE>
<CAPTION>
ISSUED:
                                                          1997            1996            1995
                                                 CONSIDERATION   CONSIDERATION   CONSIDERATION
----------------------------------------------------------------------------------------------   
<S>                                                <C>                <C>           <C>
Issued, beginning of year                          $   630,484        $627,700      $  463,811
Shares issued under option                               5,826           2,634           2,516
Shares issued in public offering                            -               -          161,184
Shares issued to purchase Arcadian Corporation         573,278              -               -
Shares issued for dividend reinvestment plan             1,461             150             189
----------------------------------------------------------------------------------------------
Issued, end of year                                 $1,211,049        $630,484      $  627,700
==============================================================================================

ISSUED:

                                                           1997           1996            1995
                                                      NUMBER OF      NUMBER OF       NUMBER OF
                                                  COMMON SHARES  COMMON SHARES   COMMON SHARES
----------------------------------------------------------------------------------------------
Issued, beginning of year                            45,581,864     45,439,667      42,988,238
Shares issued under option                              267,350        140,050         147,650
Shares issued in public offering                             -              -        2,300,000
Shares issued to purchase Arcadian Corporation        8,029,092             -               -
Shares issued for dividend reinvestment plan             17,880          2,147           3,779
----------------------------------------------------------------------------------------------
Issued, end of year                                  53,896,186     45,581,864      45,439,667
==============================================================================================
</TABLE>


STOCK OPTIONS

At December 31, 1997, there were stock options outstanding in respect of
2,461,125 common shares granted to certain employees of the Company and the
directors of PCS with an exercise price from CDN$14.00 to CDN$121.50 for
options held by optionees resident in Canada, and US$12.00 to US$86.75 for
optionees resident in the United States. As at December 31, 1997, 1,280,875
shares were subject to exercisable options.

The foregoing options have expiry dates ranging from November 30, 1999 to
November 5, 2007.

STOCK-BASED COMPENSATION DISCLOSURE

The Company continues with its policy of not recording any compensation expense
for the stock options as the exercise price is the quoted market closing price
of the Company's common shares on the last trading day immediately preceding
the date of the grant.

SHAREHOLDER RIGHTS PLAN

The Board of Directors of the Company adopted a shareholder rights plan (the
Plan) on November 10, 1994. The Plan was amended by the Board of Directors on
March 28, 1995 and May 4, 1995 and approved by the shareholders on May 11,
1995. Under the Plan, the Board of Directors declared a dividend distribution
of one right for each common share to holders of record. The rights are not
currently exercisable and only become exercisable upon the occurrence of
certain events as specified in the Plan. The Plan expires following the
Company's annual meeting in 1998 unless otherwise renewed or extended.




54
<PAGE>   60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US Dollars)

16. GEOGRAPHIC SEGMENTS

     Financial information by geographic area is summarized in the accompanying
table.

<TABLE>
<CAPTION>

                                                     CANADA      UNITED STATES        TRINIDAD      CONSOLIDATED
________________________________________________________________________________________________________________
<S>                                                <C>             <C>                <C>             <C>
1997
NET SALES TO CUSTOMERS OUTSIDE THE ENTERPRISE
  Canada                                           $ 14,460         $   27,147      $    -            $   41,607
  United States                                     188,416          1,435,138           -             1,623,554
  PhosChem                                            -                261,502           -               261,502
  Canpotex                                          229,666              -               -               229,666
  Other                                              64,261            102,548           2,791           169,600
________________________________________________________________________________________________________________
                                                   $496,803         $1,826,335      $    2,791        $2,325,929
================================================================================================================

SALES BETWEEN GEOGRAPHIC AREAS                     $  -             $    -            $143,452        $    -    
================================================================================================================
SEGMENT OPERATING EARNINGS                         $163,620         $  257,528        $ 26,492        $  447,640
================================================================================================================
ASSETS                                             $977,601         $3,019,841        $430,150        $4,427,592
================================================================================================================

1996
NET SALES TO CUSTOMERS OUTSIDE THE ENTERPRISE
  Canada                                           $ 14,507         $   28,225      $    -            $   42,732
  United States                                     136,981            668,385           -               805,366
  PhosChem                                            -                275,644           -               275,644
  Canpotex                                          184,025              -               -               184,025
  Other                                              61,526             34,575           -                96,101
________________________________________________________________________________________________________________
                                                   $397,039         $1,006,829      $    -            $1,403,868
================================================================================================================

SEGMENT OPERATING EARNINGS                         $113,317         $  186,175      $    -            $  299,492
================================================================================================================
ASSETS                                             $840,176         $1,654,211      $    -            $2,494,387
================================================================================================================

1995
NET SALES TO CUSTOMERS OUTSIDE THE ENTERPRISE
  Canada                                           $ 12,483         $   23,461      $    -            $   35,944
  United States                                     128,594            270,085           -               398,679
  PhosChem                                            -                128,320           -               128,320
  Canpotex                                          221,169              -               -               221,169
  Other                                              53,686             18,282           -                71,968
________________________________________________________________________________________________________________
                                                   $415,932         $  440,148      $    -            $  856,080
================================================================================================================

SEGMENT OPERATING EARNINGS                         $138,939         $   85,310      $    -            $  224,249
================================================================================================================
ASSETS                                             $935,075         $1,646,742      $    -            $2,581,817
================================================================================================================
</TABLE>


     Transfer prices for sales between affiliates approximate prices charged to
unaffiliated customers.

17. PROVINCIAL MINING AND OTHER TAXES

     Provincial mining taxes and other taxes consist of:

<TABLE>
<CAPTION>
                                                        1997           1996             1995
____________________________________________________________________________________________
<S>                                                <C>              <C>           <C>
Potash Production Tax                              $  53,453        $27,462        $  29,589
Saskatchewan corporate capital taxes                  16,859         12,735           13,799
____________________________________________________________________________________________
                                                   $  70,312        $40,197        $  43,388
============================================================================================
</TABLE>

18. INTEREST EXPENSE

<TABLE>
                                                        1997           1996             1995
____________________________________________________________________________________________
<S>                                                <C>              <C>             <C> 
Interest on
  Short-term debt                                  $   2,351        $    56         $    190
  Long-term debt                                      78,921         46,391           41,177
  Obligations under capital leases                       167            314              450
____________________________________________________________________________________________
                                                   $  81,439        $46,761         $ 41,817
============================================================================================

</TABLE>

                                                                        55

<PAGE>   61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


19. INCOME TAXES

     As the Company operates in a specialized industry and in several tax
jurisdictions, its income is subject to various rates of taxation.

     The provision for income taxes differs from the amount that would have
resulted from applying the statutory income tax rates to income before income
taxes as follows:

<TABLE>
<CAPTION>
                                                                                      1997       1996       1995
----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>       <C>        <C> 
Income before income taxes
Canada                                                                            $ 67,606   $ 81,067   $102,540
United States                                                                      272,520    171,664     79,892
Trinidad                                                                            26,075          -          -
----------------------------------------------------------------------------------------------------------------
Income before income taxes                                                        $366,201   $252,731   $182,432
================================================================================================================
Federal and Provincial Statutory tax rates                                           46.12%     46.12%     46.08%
================================================================================================================
Tax at statutory rates                                                            $168,892   $116,560   $ 84,065
Adjusted for the effect of:
  Net non-deductible provincial taxes and royalties and resource allowances         (7,025)   (22,879)   (22,262)
  Additional tax deductions                                                        (73,631)   (44,255)   (35,252)
  Difference between Canadian rate and rates applicable to
    subsidiaries in other countries                                                (24,662)   (10,359)    (4,502)
 Other                                                                               5,489      4,628        897
----------------------------------------------------------------------------------------------------------------
Income tax expense                                                                $ 69,063   $ 43,695   $ 22,946
================================================================================================================
</TABLE>

The principal timing differences and their tax effect are as follows:

<TABLE>
<CAPTION>
                                                                                      1997       1996       1995
----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>        <C>        <C>
Depreciation and amortization                                                     $574,673   $241,429   $201,744
Accrued reclamation costs                                                          (49,577)   (56,660)   (60,612)
Accrued post-retirement/post-employment benefits                                   (49,551)   (38,132)   (35,828)
Loss carryforwards                                                                 (75,309)   (93,900)   (94,400)
Other                                                                              (45,230)   (17,702)       394
Alternative minimum tax carryforward                                               (16,575)    (6,555)    (6,555)
----------------------------------------------------------------------------------------------------------------
Deferred income tax liability                                                     $338,431   $ 28,480   $  4,743
================================================================================================================

Details of income tax expense are as follows:
Canada - Current                                                                  $  1,024   $  3,097   $  3,236
       - Deferred                                                                    2,146          -          -
United States - Federal - Current                                                   31,888     16,861     14,967
                        - Deferred                                                  25,063     20,651      3,356
United States - State - Deferred                                                      (716)     3,086      1,387
Trinidad - Current                                                                  13,564          -          -
         - Deferred                                                                 (3,906)         -          -
----------------------------------------------------------------------------------------------------------------
Income tax expense                                                                $ 69,063   $ 43,695   $ 22,946
================================================================================================================
</TABLE>

     At December 31, 1997, the Company has income tax losses carried forward of
approximately $198,602 which will begin to expire in 1998. The benefit relating
to these loss carryforwards has been recognized by reducing deferred income tax
liabilities. In addition, the Company has alternative minimum tax credits of
approximately $16,575 which carry forward indefinitely.

     The Company has reorganized certain of its financings within the corporate
group which, among other things, resulted in certain tax benefits. These
benefits could be questioned by the relevant tax authorities. However,
management believes the ultimate resolution of the issues will not have a
material effect on the Company.

20. NET INCOME PER SHARE (EARNINGS PER SHARE)

     Net income per share is calculated on the weighted average number of shares
issued and outstanding during the twelve months ended December 31, 1997 of
52,275,000 (1996 - 45,537,000; 1995 - 43,352,000). Fully diluted net income per
share did not differ materially from net income per share in any of the
accounting periods.  

21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     The Company uses financial instruments, including forward exchange
contracts, futures, swaps and option agreements to hedge foreign exchange and
commodity price risk. The Company does not hold or issue financial instruments
for trading purposes.

     At December 31, 1997, the Company had commitments in the form of foreign
exchange contracts to sell US$46,000 (1996 - US$8,000). The fair value of these
contracts approximated the cost amount at December 31, 1997.

     The Company's exposure to interest rate risk is limited to its long-term
debt. The effective interest rate on the long-term debt approximates the stated
rate because there are no significant premiums or discounts.

56
<PAGE>   62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)

21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

     In addition to physical spot and term purchases, the Company at times
employs futures, swaps and option agreements to establish the cost on a portion
of its natural gas requirements. These instruments are intended to hedge the
future cost of the committed and anticipated natural gas purchases for its
United States nitrogen plants. Under these arrangements, the Company receives or
makes payments based on the differential between a specified price and the
actual spot price of natural gas. The Company has certain available lines of
credit which are utilized to reduce cash margin requirements to maintain the
derivatives. Cash margin requirements which have been advanced as at December
31, 1997 totalled $11,158 and are included in inventory.

     As at December 31, 1997, the Company had derivatives qualifying for
deferral in the form of futures and swaps. The futures represented a notional
amount of 17.4 million MMBtus with maturities in 1998 through 2000. The swaps
represented a notional amount of 83.3 million MMBtus with maturities in 1998
through 2002. As at December 31, 1997, net gains arising from settled hedging
transactions which are included as a component of finished goods inventory were
not material.

     The Company is exposed to credit related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company anticipates, however, that counterparties will be able to fully satisfy
their obligations under the contracts.

     The major concentration of credit risk arises from the Company's
receivables. A majority of the Company's sales are in North America and are
primarily for use in the agricultural industry. Credit risk relating to these
sales is managed through an effective credit management program.
Internationally, the Company's products are sold primarily through two export
associations whose accounts receivable are either insured or secured by letters
of credit.

     The carrying amount of the Company's cash and cash equivalents, accounts
receivable and accounts payable and accrued charges approximate fair values
because of short-term maturities. The carrying amount of the Company's long-term
debt approximates estimated fair value because the stated interest rates
approximate the market rate.

22. CONTINGENCIES

     PCS is a shareholder in Canpotex which markets potash offshore. Should any
operating losses or other liabilities be incurred by Canpotex, the shareholders
have contractually agreed to reimburse Canpotex for such losses or liabilities
in proportion to their productive capacity. There were no such operating losses
or other liabilities in 1997.

     In common with other companies in the industry, the Company is unable to
acquire insurance for underground assets.

     In June 1993, the Company was served with a complaint relating to a suit
filed in the United States District Court for Minnesota against most North
American potash producers, including the Company. The complaint alleged a
conspiracy among the defendants to fix the price of potash purchased by the
plaintiffs as well as potash purchased by the members of a class of certain
purchasers proposed by the plaintiffs. The complaint sought treble damages in an
unspecified amount and other relief. The Company filed a motion for summary
judgment on December 22, 1995. On January 2, 1997, Judge Richard H. Kyle issued
an order granting the defendants' motions for summary judgement and dismissing
the lawsuit. The plaintiffs appealed that order to the United States Court of
Appeals for the Eighth Circuit on January 31, 1997. Oral arguments were heard on
November 17, 1997.

     Additional complaints were filed in the California and Illinois State
Courts on behalf of purported classes of indirect purchasers of potash in those
states. The parties in the California lawsuit have agreed to stay proceedings
pending the outcome of the appeal to the United States Court of Appeals for the
Eighth Circuit. The Illinois State Court complaint has been dismissed for
failure to state a cause of action.

     On May 7, 1997, J. Douglas Campbell, Alfred L. Williams, Peter H. Kesser
and David L. Alyea, former officers of Arcadian Corporation, filed lawsuits
against PCS in the United States District Court for the Western District of
Tennessee. The complaints allege that PCS breached employment agreements between
Arcadian and the officers and breached the related assumption agreement among
PCS, PCS Nitrogen and Arcadian. The complaints of Mr. Campbell, Mr. Williams,
Mr. Kesser and Mr. Alyea seek damages in excess of $22.2 million, $6.2 million,
$3.7 million and $4.2 million, respectively. In addition, on October 14, 1997,
Charles Lance, a former officer of Arcadian Corporation, filed a lawsuit in the
same court against PCS also alleging breaches of his employment agreement and
the related assumption agreement. Mr. Lance seeks damages in an amount exceeding
$3.0 million. Each complaint also seeks certain additional unspecified damages.
Trial with respect to the original four plaintiffs' claims has been set for
August 17, 1998. Management of the Company, having consulted with legal counsel,
believes that the lawsuits will not have a material adverse effect on the
Company.

     On March 13, 1996, PCS Nitrogen, two other nitrogen producers and up to
thirty unidentified parties were named as defendants in a lawsuit filed in the
name of the Port Authority of New York and New Jersey (the "Port Authority") in
New Jersey State Court. The lawsuit was actually filed by the attorneys hired by
the Port Authority's subrogated insurance carriers. The Port Authority's
insurers are seeking to recover damages allegedly incurred as a result of the
explosion at the World Trade Center in New York City on February 26, 1993. On
February 7, 1997, the defendants filed a motion to dismiss the suit for failure
to state a claim upon which relief could be granted. On December 19, 1997, that
motion was granted and the complaint was dismissed with prejudice. On January
15, 1998, the Port Authority appealed the dismissal to the United States Court
of Appeals for the Third Circuit. Although neither the Port Authority nor its
subrogated insurers have alleged or otherwise revealed the amount of damages
sought from PCS Nitrogen in the lawsuit, the Port Authority stated in an
affidavit submitted to the court in support of its motion to disqualify its
insurers' counsel that as of April 9, 1996, the Port Authority had submitted to
its insurers claims relating to the explosion totaling approximately $340
million, of which the insurers had paid approximately $160 million. PCS Nitrogen
is unaware of any basis for liability and intends to continue to vigorously
defend the lawsuit.

     Various other claims and lawsuits are pending against the Company. While it
is not possible to determine the ultimate outcome of such actions at this time,
it is management's opinion that the ultimate resolution of such items, including
those pertaining to environmental matters, will not have a material effect on
the Company.

23. RELATED PARTY TRANSACTIONS

     The Company has a one-third interest in Canpotex which markets potash
offshore. Sales to Canpotex are at prevailing market prices. Sales for the year
ended December 31, 1997 were $229,666 (1996 - $184,025; 1995 - $221,169).

     Account balances resulting from the Canpotex transactions are included in
the Consolidated Statements of Financial Position and settled on normal trade
terms.



                                                                            57
<PAGE>   63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


24. QUARTERLY RESULTS (UNAUDITED)

     The following quarterly information in management's opinion includes all
adjustments (consisting solely of normal recurring adjustments) necessary for
fair presentation.

<TABLE>
<CAPTION>
                                             First        Second         Third        Fourth
                                           Quarter       Quarter       Quarter       Quarter
____________________________________________________________________________________________
<S>                                       <C>           <C>           <C>           <C>
1997
Net sales                                 $464,834      $676,648      $573,773      $610,674
============================================================================================
Gross Margin                              $115,027      $184,152      $149,466      $136,526
============================================================================================
Operating Income                          $ 90,513      $154,714      $108,851      $ 93,562
============================================================================================
Net Income                                $ 56,365      $ 96,980      $ 71,418      $ 72,375
============================================================================================
Net Income per Share                      $   1.18      $   1.81      $   1.33      $   1.35
============================================================================================
1996
Net sales                                 $366,871      $352,369      $342,148      $342,480
============================================================================================
Gross Margin                              $107,404      $ 90,313      $ 89,884      $ 96,373
============================================================================================
Operating Income                          $ 87,122      $ 74,366      $ 66,418      $ 71,586
============================================================================================
Net Income                                $ 63,678      $ 52,398      $ 46,772      $ 46,188
============================================================================================
Net Income per Share                      $   1.40      $   1.15      $   1.03      $   1.01
============================================================================================
</TABLE>

     Net Income per Share for each quarter has been computed based on the
weighted average number of shares issued and outstanding during the respective
quarter; therefore, quarterly amounts may not add to the annual total.

25. COMPARATIVE FIGURES

     Certain of the prior years' figures have been reclassified to conform with
the current year's presentation.

26. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

     A description of the accounting principles which differ significantly in
certain respects from generally accepted accounting principles in the United
States (US GAAP) follows:

     Deferred income taxes: Deferred tax assets have been recognized only to the
extent of reducing deferred tax liabilities. US GAAP would require that deferred
tax assets be recorded when their realization is more likely than not.

     Foreign currency translation adjustment: The foreign currency translation
adjustment results from the restatement of prior periods so that all periods
presented are in the same reporting currency. US GAAP requires that the
comparative Consolidated Statements of Income and the Consolidated Statements of
Cash Flow be translated using weighted average exchange rates for the applicable
periods. In contrast, the Consolidated Statements of Financial Position are
translated using the exchange rates at the end of the applicable periods. The
difference in these exchange rates is what gives rise to the foreign currency
translation adjustment.

     Net sales: Sales are recorded net of freight costs (less related revenues)
and transportation and distribution expenses. US GAAP would require that net
freight costs be included in cost of sales and transportation and distribution
expenses be reported as an operating expense.

     Non-cash financing and investing activities: Non-cash financing and
investing activities are included in the statement of cash flow. US GAAP
requires that non-cash financing and investing activities be disclosed
supplementally rather than being included in the statement of cash flow.

     In 1995, the Financial Accounting Standards Board issued Statement No. 123
"Accounting for Stock-Based Compensation." The Company has decided to continue
to apply APB Opinion 25 ("APB 25") for measurement of compensation of employees.


























     THE APPLICATION OF US GAAP, AS DESCRIBED ABOVE, WOULD HAVE HAD THE
FOLLOWING APPROXIMATE EFFECTS ON NET INCOME, NET INCOME PER SHARE, TOTAL ASSETS
AND SHAREHOLDERS' EQUITY:


<TABLE>
<CAPTION>
                                                                                           1997             1996             1995
_________________________________________________________________________________________________________________________________
<S>                                                                                  <C>               <C>              <C>    
Net income as reported in the consolidated statements of income 
  and retained earnings                                                              $  297,138       $  209,036       $  159,486
Item (decreasing) increasing reported net income
 Deferred income taxes                                                                  (11,382)          (7,216)          18,598
_________________________________________________________________________________________________________________________________
Approximate net income - US GAAP                                                     $  285,756       $  201,820       $  178,084
=================================================================================================================================
Approximate net income per share - US GAAP                                           $     5.47       $     4.43       $     4.11
=================================================================================================================================

Total assets as reported in the consolidated statements of financial position        $4,427,592       $2,494,387       $2,581,817
Item increasing reported total assets
 Deferred income tax asset                                                                   -            15,727           18,598
_________________________________________________________________________________________________________________________________
Approximate total assets - US GAAP                                                   $4,427,592       $2,510,114       $2,600,415
=================================================================================================================================

Shareholders' equity as reported in the consolidated statements of
 financial position                                                                  $2,227,891       $1,405,496       $1,241,875
Item increasing reported shareholders' equity
 Deferred income taxes                                                                       -            11,382           18,598
_________________________________________________________________________________________________________________________________
Approximate shareholders' equity - US GAAP                                           $2,227,891       $1,416,878       $1,260,473
=================================================================================================================================
</TABLE>




58
<PAGE>   64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)


SUPPLEMENTAL US GAAP DISCLOSURE

     New Accounting Pronouncements

     In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. This
Statement establishes standards for the computation of basic and diluted
earnings per share and requires that the treasury stock method be utilized in
the computation of diluted earnings per share. Adoption of this statement did
not have a material impact on basic or diluted earnings per share.

     The Company has also adopted the provisions of SFAS No. 129, Disclosure of
Information about Capital Structure.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, both of which will be effective for the
Company's 1998 fiscal year. Adoption of these standards will not have a material
impact on the Company's financial statements.

DEFERRED INCOME TAXES

     The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax liability are:

<TABLE>
<CAPTION>
                                                           1997            1996
_______________________________________________________________________________
<S>                                                    <C>             <C>
Deferred income tax assets:
  Loss and credit carry forwards                       $ 91,884      $  100,455
  Post-retirement/post-employment benefits               49,551          38,132
  Accrued reclamation costs                              49,577          56,660
  Other                                                  63,858          33,429
_______________________________________________________________________________
Total deferred income tax assets                        254,870         228,676
_______________________________________________________________________________
Deferred income tax liabilities:
  Basis difference in fixed assets                      574,673         241,429
  Other                                                  18,628           4,345
_______________________________________________________________________________
Total deferred income tax liabilities                   593,301         245,774
_______________________________________________________________________________
Net deferred income tax liability                      $338,431      $   17,098
===============================================================================
Consisting of:
  Current deferred income tax asset                    $     -       $  (15,727)
  Long-term deferred income tax liability               338,431          32,825
_______________________________________________________________________________
                                                       $338,431      $   17,098
===============================================================================
</TABLE>

STOCK COMPENSATION PLANS

     The Company has two stock-based compensation plans which are described
below. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. No compensation cost has been recognized under APB 25
as the exercise price of the options at the grant date is equal to the market
value of the shares at the grant date. Had compensation cost for the Company's
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method of FASB Statement No. 123, the
Company's net income and net income per share for the year ending December 31,
1997 would have been reduced to the pro forma amounts indicated below:


<TABLE>
                                                  1997                          1996
______________________________________________________________________________________________
<S>                                   <C>              <C>           <C>             <C>
                                      AS REPORTED      PRO FORMA     AS REPORTED     PRO FORMA
______________________________________________________________________________________________
Net income                               $285,756       $271,497        $201,820      $191,936
Net income per share                     $   5.47       $   5.19        $   4.43      $   4.21
</TABLE>


     The fair value of each option grant is estimated on the date of grant using
the Modified Black-Scholes option-pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                             1997           1996            1995
________________________________________________________________________________
<S>                                       <C>            <C>             <C>
Expected dividend                           $1.03          $1.06           $1.06
Expected volatility                           26%            32%             37%
Risk-free interest rate                     5.80%          6.90%           6.80%
Expected life of option                  10 years       10 years        10 years
Expected forfeitures                          26%            25%             25%
</TABLE>

     The Company has two option plans. Under the Officer and Key Employee Plan,
the Company may, after January 24, 1995, issue up to 3,842,000 common shares
pursuant to the exercise of options. Under the Directors Plan, the Company may,
after January 24, 1995, issue up to 456,000 common shares pursuant to the
exercise of options. Under both plans, the exercise price of each option equals
the closing market price of the Company's shares on the trading day prior to the
grant and an option's maximum term is ten years. All options granted to date
have provided that one-half of the options granted in a year will vest one year
from the date of the grant, with the other half of the options vesting the
following year.


                                                                            59

<PAGE>   65


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)

26. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

     A summary of the status of the plans as of December 31, 1997, 1996 and 1995
and changes during the years ending on those dates is presented below:

NUMBER OF SHARES SUBJECT TO OPTION

<TABLE>
                                                      1997              1996             1995
_____________________________________________________________________________________________
<S>                                              <C>               <C>              <C>
Outstanding, beginning of year                   1,845,475         1,395,525        1,048,675
Granted                                            889,750           592,000          494,500
Exercised                                         (267,350)         (140,050)        (147,650)
Cancelled                                           (6,750)           (2,000)           -
_____________________________________________________________________________________________
Outstanding, end of year                         2,461,125         1,845,475        1,395,525
=============================================================================================
</TABLE>

WEIGHTED AVERAGE EXERCISE PRICE

<TABLE>
<CAPTION>
                                                      1997              1996             1995
_____________________________________________________________________________________________
<S>                                              <C>               <C>              <C>
Outstanding, beginning of year                   $   52.90         $   34.74        $   23.19
Granted                                              86.11             71.00            74.52
Exercised                                            23.12             20.95            18.24
Cancelled                                            78.44             74.75              -
Outstanding, end of year                             68.11             52.90            34.74
</TABLE>


     The weighted-average grant-date fair value of options granted during the
year was $23,712 (1996 - $14,206; 1995 - $14,416). The following table
summarizes information about stock options outstanding at December 31, 1997:


<TABLE>
<CAPTION>
                                                   OPTIONS             OPTIONS
                                               OUTSTANDING         EXERCISABLE
______________________________________________________________________________________________________________
RANGE OF EXERCISE                 NUMBER  WEIGHTED AVERAGE    WEIGHTED AVERAGE                WEIGHTED AVERAGE
PRICES                       OUTSTANDING    REMAINING LIFE      EXERCISE PRICE      NUMBER      EXERCISE PRICE
______________________________________________________________________________________________________________
<S>                          <C>           <C>                   <C>               <C>             <C> 
$12.00 to $18.38                  45,625         4 years            $16.29          45,625          $16.29
$20.00 to $25.38                 222,350         6 years             22.04         222,350           22.04
$32.25                           232,850         7 years             32.25         232,850           32.25
$70.38 to $74.75               1,075,050         9 years             72.59         780,050           73.19
$81.75 to $86.75                 885,250        10 years             86.34            -                -
</TABLE>


     The following supplemental schedules present the Consolidated Financial
Position, Income and Cash Flow in accordance with US GAAP as adjusted for the
GAAP differences described in this note.

SUPPLEMENTAL SCHEDULE OF CONSOLIDATED FINANCIAL POSITION

<TABLE>
<CAPTION>

As at December 31                  
(in thousands of US dollars)
                                                                       1997               1996
______________________________________________________________________________________________
 <S>                                                             <C>                <C> 
ASSETS
Current Assets
  Cash and cash equivalents                                      $    8,756         $    -     
  Accounts receivable                                               351,154            230,778
  Inventories                                                       353,425            219,433
  Prepaid expenses                                                   21,131             16,748
  Deferred income tax asset                                            -                15,727
______________________________________________________________________________________________
                                                                    734,466            482,686
Property, plant and equipment                                     2,995,625          1,978,692
Goodwill                                                            574,296              1,686
Other assets                                                        123,205             47,050
______________________________________________________________________________________________
                                                                 $4,427,592         $2,510,114
==============================================================================================
LIABILITIES
Current Liabilities
  Bank indebtedness                                              $    -            $     6,330
  Short-term debt                                                   101,928              - 
  Accounts payable and accrued charges                              348,103            180,008

  Current portion of long-term debt                                   2,400              1,520
  Current obligations under capital leases                              340                300
______________________________________________________________________________________________
                                                                    452,771            188,158
Long-term debt                                                    1,129,141            618,800
Obligations under capital leases                                        823              1,163
Deferred income tax liability                                       338,431             32,825
Accrued post-retirement/post-employment benefits                    123,418             95,460
Accrued reclamation costs                                           139,105            146,512
Other non-current liabilities and deferred credits                   16,012             10,318
______________________________________________________________________________________________
                                                                  2,199,701          1,093,236
______________________________________________________________________________________________
SHAREHOLDERS' EQUITY
Share Capital                                                     1,211,049            630,484
Contributed Surplus                                                 336,486            336,486
Retained Earnings                                                   701,285            470,837
Foreign Currency Translation Adjustment                             (20,929)           (20,929)
______________________________________________________________________________________________
                                                                  2,227,891          1,416,878
______________________________________________________________________________________________
                                                                 $4,427,592         $2,510,114
==============================================================================================
</TABLE>

60

<PAGE>   66


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)

26. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

SUPPLEMENTAL SCHEDULE OF CONSOLIDATED INCOME AND RETAINED EARNINGS

<TABLE>
<CAPTION>

For the Years Ended December 31                                                                                     
(in thousands of US dollars)                                            1997             1996             1995
__________________________________________________________________________________________________________________
<S>                                                                  <C>              <C>              <C>
__________________________________________________________________________________________________________________
Net sales                                                            $2,610,346       $1,552,885       $  910,988
Cost of goods sold                                                    1,963,565        1,119,758          549,185
__________________________________________________________________________________________________________________
GROSS MARGIN                                                            646,781          433,127          361,803
__________________________________________________________________________________________________________________
Selling, distribution and administrative                                161,273          109,295          109,031
Provincial mining and other taxes                                        70,312           40,197           43,388
Other income                                                            (32,444)         (15,857)         (14,865)
__________________________________________________________________________________________________________________
                                                                        199,141          133,635          137,554
__________________________________________________________________________________________________________________
OPERATING INCOME                                                        447,640          299,492          224,249
INTEREST EXPENSE                                                         81,439           46,761           41,817
__________________________________________________________________________________________________________________
INCOME BEFORE INCOME TAXES                                              366,201          252,731          182,432
INCOME TAXES                                                             80,445           50,911            4,348
__________________________________________________________________________________________________________________
NET INCOME                                                              285,756          201,820          178,084
RETAINED EARNINGS, BEGINNING OF YEAR                                    470,837          317,216          184,966
DIVIDENDS                                                               (55,308)         (48,199)         (45,834)
__________________________________________________________________________________________________________________
RETAINED EARNINGS, END OF YEAR                                       $  701,285       $  470,837       $  317,216
==================================================================================================================
NET INCOME PER SHARE -- BASIC                                        $     5.47       $     4.43       $     4.11
==================================================================================================================
NET INCOME PER SHARE -- FULLY DILUTED                                $     5.42       $     4.39       $     4.06
==================================================================================================================
DIVIDENDS PER SHARE                                                  $     1.03       $     1.06       $     1.06
==================================================================================================================
</TABLE>

SUPPLEMENTAL SCHEDULE OF CONSOLIDATED CASH FLOW

<TABLE>
<CAPTION>

For the Years Ended December 31                                                                                  
(in thousands of US dollars)                                              1997             1996             1995
__________________________________________________________________________________________________________________
<S>                                                                  <C>              <C>              <C>
OPERATING ACTIVITIES
Net Income                                                           $  285,756       $  201,820       $  178,084
Items not affecting cash
  Depreciation and amortization                                         170,002           90,125           70,953
  (Gain) loss on disposal of fixed assets                                (4,739)           2,152              726
  Provision for deferred income tax                                      45,873           30,953          (13,855)
  Provision for post-retirement/post-employment benefits                  6,166            5,890            2,052
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
  Accounts receivable                                                    23,470           (7,400)         (48,831)
  Inventories                                                            19,873            2,493            9,297
  Prepaid expenses                                                        3,736           (1,393)           4,299
  Accounts payable and accrued charges                                  (68,623)         (19,214)          26,581
Accrued reclamation costs                                                (7,407)          (5,021)           5,214
Other non-current liabilities and deferred credits                       (6,286)          (4,219)          (1,037)
__________________________________________________________________________________________________________________
CASH PROVIDED BY OPERATING ACTIVITIES                                   467,821          296,186          233,483
__________________________________________________________________________________________________________________
INVESTING ACTIVITIES
Additions to property, plant and equipment                             (160,337)         (58,939)         (39,596)
Acquisition of Texasgulf Inc.                                             --               --            (812,226)
Acquisition of White Springs Agricultural Chemicals, Inc.                 --               --            (291,540)
Acquisition of Arcadian Corporation                                    (474,985)
Proceeds from disposal of fixed assets                                   15,276           22,716              503
Additions to other assets                                               (22,091)          (2,819)         (10,298)
__________________________________________________________________________________________________________________
CASH USED IN INVESTING ACTIVITIES                                      (642,137)         (39,042)      (1,153,157)
__________________________________________________________________________________________________________________
FINANCING ACTIVITIES
Proceeds from long-term obligations                                   1,210,000            --            1,040,000
Repayment of long-term obligations                                     (699,979)        (258,556)        (214,460)
Proceeds from short-term debt                                           210,000            --               --
Repayment of short-term debt                                           (108,072)           --               --
Repayment of Senior Notes                                              (374,526)           --               --
Dividends                                                               (55,308)         (48,199)         (45,834)
Issuance of shares                                                        7,287            2,784          163,889
__________________________________________________________________________________________________________________
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                         189,402         (303,971)         943,595
__________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH                                              15,086          (46,827)          23,921
(BANK INDEBTEDNESS) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         (6,330)          40,497           16,576
__________________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), END OF YEAR             $  8,756       $   (6,330)      $   40,497
==================================================================================================================
</TABLE>

SUPPLEMENTAL CASH FLOW INFORMATION

     On March 6, 1997, the Company acquired all of the outstanding shares of
Arcadian. The consideration paid included 8,029,092 common shares of the Company
valued at $573,278.

                                                                             61
<PAGE>   67

BOARD OF DIRECTORS

ISABEL B. ANDERSON [PICTURE]

     Ms. Anderson, President and Chief Executive Officer of A&L Information
Brokers, a Calgary-based information brokerage company, joined the PCS Board in
1989 and is on the executive committee. A longtime Professor of Economics at the
University of Saskatchewan and specialist in international economics and
Canadian public policy, she was a Commissioner in 1986 for Saskatchewan's public
hearings on the Canada-United States trade negotiations. She has served on the
Canadian delegation to the United Nations Conference on Science and Technology
in Vienna, Austria, and on the Canadian NGO delegation to the United Nations
Conference on Trade and Development in Nairobi, Kenya. She works extensively on
the implications of public policy for the growth and development of the Western
Canadian economy, particularly in Saskatchewan.

DOUGLAS J. BOURNE [PICTURE]

     Mr. Bourne, of Houston, Texas, is a director, former Chairman and retired
CEO of Battle Mountain Gold Company and, before that, Group Vice President and
director of Pennzoil Company, and Chairman and CEO of Duval Corporation, its
mining subsidiary. A past Chairman of the Potash & Phosphate Institute and the
Sulphur Institute, and a director of The Fertilizer Institute and the American
Mining Congress, he was elected to the PCS Board in 1990 and heads the
environmental affairs committee.

CHARLES E. CHILDERS [PICTURE]

     Mr. Childers, President and CEO of Potash Corporation of Saskatchewan Inc.
and its predecessor company since 1987, joined the Board in 1989 and became
Chairman in 1990. He is Chairman of the executive committee. He is past
President of the International Fertilizer Industry Association and past Chairman
of the Potash & Phosphate Institute, Canpotex Limited, the Saskatchewan Potash
Producers Association and The Fertilizer Institute. He is active in the
Fertilizer Industry Advisory Committee to the Food and Agriculture Organization,
and sits on the board of directors of Battle Mountain Gold Company and KAP
Resources Ltd.

DENIS J. COTE [PICTURE]

     Mr. Cote retired Chairman and CEO of the UMA Group Ltd., was President,
Chief Executive Officer and member of the board of Reclamation Management Ltd.
in Vancouver, British Columbia in 1993. He has served on the PCS Board since
1989, sits on the executive committee and heads the compensation committee.
Former Chairman and director of Joss Energy Ltd., he is a director of the
successor company, Startech Energy Inc. He is a founder and Chairman of Inter
West Energy Corporation, which merged with New Cache Resources in 1997, and a
member of the board of the Vancouver Port Corporation. From 1975 to 1981, he
served on the board of governors of the University of Calgary.

WILLIAM J. DOYLE [PICTURE]

     Mr. Doyle, President of PCS Sales, has served on the PCS Board since 1989.
He became President of PCS Sales in 1987 and prior to that was International
Vice President of International Minerals and Chemical Corporation. He is past
Chairman of Canpotex Limited and continues to serve on its board, as well as the
boards of the Potash & Phosphate Institute, PhosChem and Fersan S.A. in the
Dominican Republic. He chairs the International Fertilizer Industry
Association's Potash Committee.

THE HONOURABLE WILLARD Z. ESTEY, Q.C. [PICTURE]

     Mr. Estey, of Toronto, Ontario, is a former Chief Justice of Ontario and
Justice of the Supreme Court of Canada. He was appointed Queen's Counsel in
1960. A PCS director since 1990, he sits on the audit committee. He is a
director of Canwest Global Communications Corporation, CamVec Corporation, ACC
Corp. and Fundy Cable Ltd. He is Chairman of the Ballard Foundation, the
Canadian Law Scholarship Foundation and the Ontario Press Council.

DALLAS J. HOWE [PICTURE]

     Mr. Howe, President and CEO of Advanced DataSystems Ltd. and BDM
Information Systems Group of Companies, served on the PCS Board from 1982 to
1989 and was reappointed in 1991. He sits on the audit committee. He has been
President, CEO and founder of an extensive group of high technology information
and data systems companies over twenty years, and is a director of the Saskatoon
Regional Economic Development Authority and Saskatoon City Hospital Foundation.

JAMES F. LARDNER [PICTURE]

     Mr. Lardner, of Davenport, Iowa, is a retired Vice President of Deere &
Company who was responsible for agricultural tractor design and North American
tractor operations. He joined the PCS Board in 1989 and serves on the executive
committee. He is a director of the Sears Manufacturing Company and a former
director of the Trane Company and American Standard Inc. Elected to the National
Academy of Engineering in 1985, he often serves on bodies which advise United
States government agencies and departments on science, technology and
engineering policy. He is a consultant on manufacturing strategy and management,
and manufacturing and information technology.

DONALD E. PHILLIPS [PICTURE]

     Mr. Phillips, of Brandon, Mississippi, former President and CEO of
Pitman-Moore Inc., joined the PCS Board in 1991 and serves on the compensation
committee. A director of Great Lakes REIT Inc., Oak Brook, Illinois, he is
Chairman of the board of directors of Synbiotics Inc., San Diego, California. He
is President of Holmes Community College Development Foundation, Goodman,
Mississippi, a regent of Bethel College and Seminary in St. Paul, Minnesota, a
trustee of Mississippi College, Clinton, Mississippi, and former Chairman of the
board of Lake Forest Graduate School of Business, Lake Forest, Illinois.




62

<PAGE>   68
BOARD OF DIRECTORS

PAUL J. SCHOENHALS [PICTURE]

     Mr. Schoenhals, President of Petroleum Industry Training Service in
Calgary, Alberta, was Chairman of Potash Corporation of Saskatchewan from 1987
to 1989. He rejoined the Board in 1992, and sits on the environmental affairs
committee. A former Member of the Legislative Assembly and Cabinet Minister in
Saskatchewan, he is on the boards of Upton Resources Inc., Brandon Energy Ltd.
and Petroleum Industry Training Service. He has been a director of Precambrian
Shield Resources and Sabre West Oil & Gas and on the national advisory board for
Marsh & McLennan. He sits on the national advisory committee for Bayer Care
Canada.

DARYL K. SEAMAN [PICTURE]

     Mr. Seaman, Chairman and President of Dox Investments Inc. in Calgary,
Alberta, joined the PCS Board of Directors in 1989 and is a member of the
compensation committee. Former Chairman and CEO of Bow Valley Industries Ltd.,
he is a director of Encal Energy Ltd., Renaissance Energy Ltd., Far West Mining
Ltd., Abacan Resource Corporation, Basic Industries Corporation, Canadian
Chemical Reclaiming Ltd. and Bow Valley Energy Ltd. He is co-owner and director
of the Calgary Flames Hockey Club.

E. ROBERT STROMBERG, Q.C. [PICTURE]

     Mr. Stromberg, Partner in Saskatchewan law firm Robertson Stromberg, was
elected to the PCS Board in 1991 and serves on the executive committee. Admitted
to the Saskatchewan Bar in 1969 and appointed Queen's Counsel in 1984, he is a
member of the Law Society of Saskatchewan and the Saskatoon Bar Association. He
serves on the advisory board for the Centre for International Business Studies,
is Chairman of the Saskatoon Airport Authority, a director of the Canadian
Airports Council and past President of the Saskatchewan Place board.

JACK G. VICQ [PICTURE]

     Mr. Vicq, Professor of Accounting and Associate Dean of the College of
Commerce, University of Saskatchewan, is responsible for the Centre for
International Business Studies, established to help Saskatchewan businesses
explore export markets and to improve co-operation between the academic and
business communities in developing export opportunities. A member of the PCS
Board since 1989, he heads the audit committee. He sits on committees of the
Saskatchewan and Canadian Institutes of Chartered Accountants and has worked for
the Saskatchewan and Canadian governments in areas of policy, finance and
taxation.

BARRIE A. WIGMORE [PICTURE]

     Mr. Wigmore, a Limited Partner with New York investment banking firm
Goldman Sachs Group, L.P., headed its efforts in such regulated industries as
electric and gas utilities, pipelines and telecommunications. He joined the PCS
Board in 1989 and sits on the compensation committee. He writes on financial
history and current financial markets and is Chairman of the American Friends of
Worcester College (Oxford University), trustee of the Progressive Policy
Institute and a director of National Service Industries Inc.

PAUL S. WISE [PICTURE]

     Mr. Wise, of Carefree, Arizona, a past President and CEO of the Alliance of
American Insurers and a member of the PCS Board since 1989, currently sits on
the environmental affairs committee. He is also on the boards of United Funds,
Waddell & Reed Funds and TMK/United Funds, and has been on the boards of the
College of Insurance, the Institute of Civil Justice at the Rand Corporation,
the Insurance Hall of Fame, and the National Safety Council and Senior Net. He
was President of the Property Loss Research Bureau and a director of the
Insurance Institute for Highway Safety.

COMMITTEES

EXECUTIVE COMMITTEE:

     The executive committee is composed of five directors. Between meetings of
the Board it has, with certain exceptions, all the powers vested in the Board.
In addition, the executive committee nominates candidates for directorship of
the Corporation. It also has responsibility for corporate governance issues.

AUDIT COMMITTEE:

     The audit committee is composed of three directors, none of whom may be an
officer or employee of the Corporation or any of its affiliates. The committee
meets with the Corporation's financial management personnel, internal auditor
and external auditor at least once each quarter to review the Corporation's
financial reporting practices and procedures and authorize the release of
unaudited quarterly financial statements, and reviews the Corporation's annual
financial statements prior to their submission to the Board for approval. The
committee also recommends to the Board the external auditors to be proposed to
the shareholders for appointment at the annual meeting.

COMPENSATION COMMITTEE:

     The compensation committee is composed of four non-employee directors. This
committee formulates and makes recommendations to the Board in respect of
compensation issues relating to directors and senior management of the
Corporation and in respect of corporate salary and benefits policy. It reviews
and approves, on an annual basis, the Corporation's salary administration
program. It is responsible for the annual report on executive compensation. The
committee, in consultation with the Chief Executive Officer, considers and

BOARD OF DIRECTORS


reports to the Board regarding corporate succession matters.

ENVIRONMENTAL AFFAIRS COMMITTEE:

     The environmental affairs committee is composed of three directors. The
committee works to ensure that the Corporation's commitment to the protection of
the environment is fulfilled. It routinely receives environmental audit reports
for review and discussion with senior management and monitors environmental
issues in other areas of corporate activity such as off-site transportation,
distribution and storage of product. The committee reviews and discusses with
management potential changes to regulatory requirements and to corporate
environmental policy.


                                                                             63

<PAGE>   69


SHAREHOLDER INFORMATION

ANNUAL MEETING

     The Annual Meeting of the shareholders of the Company will be held at 10:30
a.m. Central Standard Time May 7, 1998 in the Commonwealth Ballroom, Ramada
Hotel, First Avenue and 22nd Street East, Saskatoon, Saskatchewan.

     Holders of common shares as of March 19, 1998 are entitled to vote at the
meeting and are encouraged to participate. Shareholders who cannot attend are
urged to complete and mail their proxies promptly to ensure their common shares
will be voted.

DIVIDENDS

     Dividend amounts paid to shareholders resident in the United States were
adjusted by the exchange rate applicable on the dividend record date. Dividends
are normally paid in February, May, August and November, with record dates
normally set approximately three weeks before the payment date.

     Future cash dividends will be paid out of, and conditioned upon, the
Corporation's available earnings. Shareholders who wish to have their dividends
deposited directly in their bank accounts should contact the transfer agent and
registrar, CIBC Mellon Trust.

DIVIDEND REINVESTMENT POLICY

     A dividend reinvestment plan established in 1993 allows registered
shareholders to have dividends reinvested to newly-issued common shares of the
Corporation at prevailing market rates.

INFORMATION FOR SHAREHOLDERS OUTSIDE CANADA

     Dividends paid to residents in countries with which Canada has bilateral
tax treaties, which is the majority of countries, are generally subject to the
15-percent Canadian non-resident withholding tax. There is no Canadian tax on
gains from the sale of shares or debt instruments owned by non-residents not
carrying on business in Canada. No level of government in Canada levies estate
taxes or succession duties.

INVESTOR INQUIRIES

     Shareholders with inquiries can contact Betty-Ann Heggie, Senior Vice
President, Corporate Relations by toll-free lines.


<TABLE>
<S>                                <C>
Within Canada:                     (800)667-0403
Within the US:                     (800)667-3930
</TABLE>

Website: www.potashcorp.com

INTERIM REPORTS, NEWS RELEASES AND FORM 10-K

     Those who would like to receive quarterly reports but are not registered
shareholders should contact the Company's Corporate Relations department. News
releases are also available via fax.

     Copies of the Company's most recent Form 10-K, as filed with the Securities
and Exchange Commission, are available upon request.

DUPLICATE MAILINGS

     Multiple copies of the annual and quarterly reports may be received by
shareholders who own shares in more than one account or several shareholders
living at the same address. To eliminate multiple mailings, call CIBC Mellon
Trust, the Company's transfer agent and registrar, toll-free at (800) 387-0825.

SHARES LISTED (POT)

The Toronto Stock Exchange
The Montreal Exchange
New York Stock Exchange

OWNERSHIP

     On March 3, 1998, there were 3,058 holders of record of the Company's
common shares.

AUDITORS

Deloitte & Touche
Saskatoon, Saskatchewan

LEGAL COUNSEL

Robertson Stromberg
Saskatoon, Saskatchewan

Stikeman, Elliott
Toronto, Ontario

Arent Fox Kintner Plotkin & Kahn, PLLC
Washington, DC

BANK

The Bank of Nova Scotia
Saskatoon, Saskatchewan

TAX ADVISORS

Hergott Duval Stack & Partners
Saskatoon, Saskatchewan

Goodman Phillips & Vineberg
Montreal, Quebec
New York, New York

COMMON SHARE TRANSFER AGENT

In Canada:
CIBC Mellon Trust Company
1080 - 2002 Victoria Avenue
Regina, Saskatchewan  S4P 0R7
Phone: (306) 751-7550

     Inquiries about shareholdings, share transfer requirements, address changes
or lost certificates should be directed to CIBC Mellon Trust's AnswerLine at
(800) 387-0825 or to the Corporate Secretary, PCS, Suite 500, 122 First Avenue
South, Saskatoon, Saskatchewan S7K 7G3.

In the United States:
ChaseMellon
Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, New Jersey 07660
Phone: (800) 526-0801
Website: www.chasemellon.com

[GRAPH] 1997 PCS SHARE PRICE - NYSE

[GRAPH] 1990 - 1997 PCS SHARE PRICE - NYSE


64
<PAGE>   70


COMMON SHARE PRICES AND VOLUMES

     The following table sets forth the high and low prices, as well as the
volumes, of the Company's common shares as traded on The Toronto Stock Exchange,
The Montreal Exchange and the New York Stock Exchange (composite transactions)
on a quarterly basis, as reported in The Globe and Mail and The Wall Street
Journal, for the periods indicated. Potash Corporation of Saskatchewan Inc. is a
TSE 100 company.


<TABLE>
<CAPTION>
                     The Toronto Stock Exchange1         The Montreal Exchange1             New York Stock Exchange
                   High         Low        Volume       High        Low      Volume        High       Low        Volume
<S>              <C>          <C>       <C>           <C>        <C>       <C>            <C>       <C>       <C>
1997
First Quarter     122.700      98.650     3,212,708    122.100     99.000     210,444      89.875    71.500    15,706,400
Second Quarter    117.000      99.850     2,986,406    116.800    100.300     230,607      85.000    71.000    13,678,900
Third Quarter     111.500      98.500     3,854,717    111.100     99.000     624,684      81.125    71.688    16,679,900
Fourth Quarter    122.200     108.750     8,222,508    121.900    108.950     371,250      87.500    78.000    13,866,600
Year 1997         122.700      98.500    18,276,339    122.100     99.000   1,436,985      89.875    71.000    59,931,800

1996
First Quarter     110.875      82.000     1,747,948    110.875     82.250     185,062      80.500    60.000    26,538,200
Second Quarter     97.000      83.000     1,893,727     97.700     83.000     115,952      71.875    60.250    17,187,800
Third Quarter     108.500      88.000     1,018,661    108.250     88.700     138,003      79.500    64.125    14,057,200
Fourth Quarter    117.950      91.750     3,983,487    117.850     92.950     616,267      86.875    68.250    17,897,800
Year 1996         117.950      82.000     8,643,823    117.850     82.250   1,055,284      86.875    60.000    75,681,000

1995
First Quarter      66.000      45.625     4,970,457     65.750     45.500     306,490      47.125    32.375    20,297,500
Second Quarter     76.750      60.500     2,593,136     76.500     60.750     248,742      55.875    43.500    17,041,400
Third Quarter      93.000      73.500     1,916,335     93.000     74.750     659,437      68.500    53.875    16,258,200
Fourth Quarter    107.000      79.000     4,809,481    106.125     79.000     180,231      79.000    59.500    20,969,000
Year 1995         107.000      45.625    14,289,409    106.125     45.500   1,394,900      79.000    32.375    74,566,100
</TABLE>

1 Trading prices are in CDN$

EXCHANGE RATE OF THE CANADIAN DOLLAR

     In this report, unless otherwise specified, all dollar amounts are
expressed in US dollars (US$). The Government of Canada permits a floating
exchange rate to determine the value of the Canadian dollar (C$) against the US
dollar. The exchange rate at the end of each of the five most recent years ended
December 31, and the average, the high and the low exchange rates for each of
such five years, were as follows (such rates, which are expressed in US dollars,
being the noon buying rates in Canada for cable transfers in Canadian dollars by
the Bank of Canada):

             
<TABLE>
<CAPTION>
                                        YEARS ENDED DECEMBER 31
                                    1997   1996   1995   1994   1993
                                   -----  -----  -----  -----  -----
<S>                                <C>    <C>    <C>    <C>    <C>
At end of period                   .6997  .7301  .7325  .7129  .7553
Average for period(1)              .7198  .7330  .7307  .7301  .7730
High for period                    .7495  .7527  .7534  .7644  .8050
Low for period                     .6945  .7212  .7009  .7098  .7435
</TABLE>

(1) Based on the average of the exchange rates on the last business day of each
month during the period.

The noon buying rate in New York City for cable transfers in Canadian dollars
as certified by the Bank of Canada on March 3, 1998 was US$1.00 = C$1.4184
(equivalent to C$1.00 = US$0.7050).


                          GLOSSARY OF FINANCIAL TERMS

ASSET TURNOVER = SALES / TOTAL ASSETS measures the efficiency of using assets
to produce sales.

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES measures the ability to
pay short-term debt obligations.

LONG-TERM DEBT TO EQUITY = LONG-TERM DEBT / SHAREHOLDERS' EQUITY measures the
proportion of creditor to shareholder financing.

NET INCOME PER SHARE = EARNINGS AVAILABLE TO COMMON SHARES / WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING measures the normalized earnings generated
for each common share.

QUICK RATIO = CASH + CASH EQUIVALENTS + NET RECEIVABLES / CURRENT LIABILITIES
measures the ability to meet immediate demands of creditors.

RETURN ON INVESTMENT = NET INCOME PLUS INTEREST EXPENSE / TOTAL ASSETS measures
the profitability or earning power of all assets employed.

RETURN ON SHAREHOLDERS' EQUITY = NET INCOME / SHAREHOLDERS' EQUITY measures the
adequacy of return on the owners' investment.

SHAREHOLDERS' EQUITY TO TOTAL ASSETS = SHAREHOLDERS' EQUITY / TOTAL ASSETS
measures the proportion of assets to shareholder financing.

FREE CASH FLOW is the cash, exclusive of the change in working capital, which
is provided by operations less disbursements for sustaining capital,
capitalized turnarounds and dividends.

CUMULATIVE RETURN to shareholders is calculated by using the difference between
the beginning and ending share prices on the NYSE for the period indicated,
plus dividends received.



[SYMBOL]
It is the policy of PCS to manage its operations responsibly in order to
safeguard those natural resources related to or affected by its activities. In
keeping with this policy, the Annual Report uses paper containing at least 10%
post-consumer recycled fiber and is recyclable.
<PAGE>   71


CORPORATE OFFICERS AND KEY MANAGEMENT

POTASH CORPORATION OF SASKATCHEWAN INC.

CHARLES E. CHILDERS
Chairman, President and
Chief Executive Officer


WAYNE R. BROWNLEE              BARRY E. HUMPHREYS
Senior Vice President          Senior Vice President
Expansion and Development      Finance and Treasurer

JOHN GUGULYN                   PETER BRAUN
Senior Vice President          Vice President
Administration                 Audit

JOHN L. M. HAMPTON             DENIS A. SIROIS
Senior Vice President          Vice President and
General Counsel and Secretary  Corporate Controller

BETTY-ANN L. HEGGIE
Senior Vice President
Corporate Relations


PCS SALES                      PCS PHOSPHATE

WILLIAM J. DOYLE               THOMAS J. WRIGHT
President                      President

RICHARD J. LACROIX             THOMAS J. REGAN, JR.
Executive Vice President       Executive Vice President

P. RODNEY WILSON               WILLIAM T. COOPER, JR.
Executive Vice President       Vice President
                               Production - Aurora
PCS POTASH
                               VERNON J. LLOYD
GARTH W. MOORE                 Vice President
President                      Production - White Springs

JAMES J. BUBNICK               PCS NITROGEN
Executive Vice President
                               GARY E. CARLSON
                               President

                               JAMES F. DIETZ
                               Executive Vice President




CORPORATE DATA

POTASH CORPORATION OF SASKATCHEWAN INC.             PCS POTASH - ESTERHAZY
Suite 500                                           P.O. Box 1060
122 - 1st Avenue South                              Esterhazy, SK  S0A 0X0
Saskatoon, SK  S7K 7G3                              Phone: (306) 745-6601
Phone: (306) 933-8500                               Fax: (306) 745-2100
Fax: (306) 652-2699

PCS SALES                                           PCS POTASH - LANIGAN
Suite 440                                           P.O. Box 3100
5750 Old Orchard Road                               Lanigan, SK  S0K 2M0
Skokie, IL  60077                                   Phone: (306) 365-2030
Phone: (800) 241-6908                               Fax: (306) 365-2526
(847) 583-4400
Fax: (847) 966-1293
                                                                 
PCS PHOSPHATE                                       PCS POTASH - MOAB
P.O. Box 30321                                      P.O. Box 1208
3101 Glenwood Avenue                                Moab, UT  84532-1208
Raleigh, NC  27622-0321                             Phone: (435) 259-7171
Phone: (919) 881-2700                               Fax: (435) 259-7100
Fax: (919) 881-2847
                                                                
PCS NITROGEN                                        PCS POTASH - NEW BRUNSWICK
3175 Lenox Park Boulevard                           P.O. Box 5039
Suite 400                                           Sussex, NB  E4E 5L2
Memphis, TN  38115-4256                             Phone: (506) 432-8400
Phone: (901) 758-5200                               Fax: (506) 433-6617
Fax: (901) 758-5201

FLORIDA FAVORITE FERTILIZER                         PCS POTASH - PATIENCE LAKE
P.O. Box 8000                                       P.O. Box 509
Lakeland, FL  33802                                 Saskatoon, SK  S7K 3L6
Phone: (941) 688-2442                               Phone: (306) 374-4800
Fax: (941) 682-6652                                 Fax: (306) 955-0424

PCS PHOSPHATE - AURORA                              PCS POTASH - ROCANVILLE
P.O. Box 48                                         P.O. Box 460
Hickory Point Road                                  Rocanville, SK  S0A 3L0
Aurora, NC  27806                                   Phone: (306) 645-2870
Phone: (919) 322-4111                               Fax: (306) 645-2733
Fax: (919) 322-5686

PCS PHOSPHATE - WHITE SPRINGS                       PCS NITROGEN - AUGUSTA
P.O. Box 300                                        P.O. Box 1483
White Springs, FL  32096                            Augusta, GA  30903
Phone: (904) 397-8101                               Phone: (706) 849-6100
Fax: (904) 397-1026                                 Fax: (706) 849-6111

DAVENPORT FEED PLANT                                PCS NITROGEN - CLINTON
Highway 22 West                                     P.O. Box 2966
P.O. Box 500                                        Clinton, IA  52733-2966
Buffalo, IA  52728                                  Phone: (319) 243-5800
Phone: (319) 381-1130                               Fax: (319) 243-7528
Fax: (319) 381-4990

KINSTON FEED PLANT                                  PCS NITROGEN - GEISMAR
3102, Highway 11 North                              P.O. Box 307
P.O. Box 1005                                       Geismar, LA  70734
Kinston, NC  28503                                  Phone: (504) 621-1500
Phone: (919) 522-4077                               Fax: (504) 621-1504
Fax: (919) 522-4996
                            
MARSEILLES FEED PLANT                               PCS NITROGEN - LAPLATTE
US Route 6 East                                     CS 7354
P.O. Box 88                                         Bellevue, NE  68005
Marseilles, IL  61341                               Phone: (402) 291-0090
Phone: (815) 795-5111                               Fax: (402) 293-6262
Fax: (815) 795-5117

SALTVILLE FEED PLANT                                PCS NITROGEN - LIMA
Government Plant Road                               P.O. Box 628
P.O. Box 1069                                       Lima, OH  45802-0628
Saltville, VA  24370                                Phone: (419) 226-1200
Phone: (540) 496-4741                               Fax: (419) 226-1500
Fax: (540) 496-5116
                                                                        
WEEPING WATER FEED PLANT                            PCS NITROGEN - MEMPHIS
East Garfield Street                                5790 Old Millington Road
P.O. Box 171                                        Millington, TN  38053-8306
Weeping Water, NE  68463                            Phone: (901) 354-3300
Phone: (402) 267-2365                               Fax: (901) 354-3338
Fax: (402) 267-7235
                                                                 
PCS POTASH - ALLAN                                  PCS NITROGEN - WILMINGTON
Allan, SK  S0K 0C0                                  P.O. Box 630
Phone: (306) 257-3312                               Wilmington, NC  28402
Fax: (306) 257-4240                                 Phone: (910) 343-3100
                                                    Fax: (910) 343-6601

PCS POTASH - CORY                                   PCS NITROGEN - TRINIDAD
P.O. Box 1320                                       Goodrich Bay Road
Saskatoon, SK  S7K 3N9                              Point Lisas, Couva
Phone: (306) 382-0525                               Trinidad, West Indies
Fax: (306) 384-9132                                 Phone: (868) 636-2205
                                                    Fax: (868) 636-8297
<PAGE>   72


                         GLOSSARY OF OPERATIONAL TERMS


GENERAL


DOMESTIC AND EXPORT MARKETS The domestic or North American market includes
Canada and the United States while the export or offshore market is the rest of
the world.

MIXED FERTILIZERS contain more than one nutrient. A 6-23-30 fertilizer contains
6 percent nitrogen [N], 23 percent phosphate [P2O5] and 30 percent potash [K2O]
by weight. The nutrient breakdown is always stated in the same order, and is
referred to in the industry as NPK.

LIQUID FERTILIZERS come in two types: solution, in which essentially all the
plant nutrients are dissolved in solution; and suspension, a saturated solution
in which some plant nutrients are suspended (by gelling clay).

METRIC TONNE is equal to 2,204.6 pounds or 1,000 kilograms. Most offshore sales
are made in metric tonnes and US dollars, F.O.B. Vancouver, BC for potash,
F.O.B. Morehead City, NC for phosphate and F.O.B. Trinidad for nitrogen.

SHORT TON is equal to 2,000 pounds. The measurement is rarely used in Canada,
following metrication, but is used in the United States. The Corporation's US
price lists are in US dollars per short ton.

PRODUCT TONNE is a standard measure of the weights of all types of potash,
phosphate and nitrogen products.

NUTRIENT TONNE is a measure of the nutrient weight of potassium, phosphate and
nitrogen fertilizers; and consists of K2O tonnes, P2O5 tonnes and N tonnes.


POTASH

POTASSIUM (K) is the seventh most common element in the earth's crust. It is
usually found combined with chlorine in the chemical compound potassium
chloride.

POTASH is a term typically used to denote materials containing potassium,
particularly potassium fertilizer. Most potash fertilizer is muriate of potash
[KCl], potassium chloride. Potassium combines with other minerals in specialty
fertilizers such as potassium sulphate [K2SO4], potassium magnesium sulphate
[K2Mg2(SO4)3] or potassium nitrate [KNO3].

POTASH ORE consists typically of KCl, NaCl and other minerals. The KCl, which
becomes the product stream, is separated from the NaCl and other minerals,
which become the tailings stream. Processing 100 tonnes of ore typically
produces 28 to 38 tonnes of product.

K2O is potassium oxide, a term used in the fertilizer industry to define
potassium content. To convert 100 percent pure KCl tonnes to K2O tonnes,
multiply by 0.6317. To convert typical product tonnes to K2O tonnes, multiply
product tonnes by 0.61.

K2O tonne is a term used to provide a common measure of the potassium content
of fertilizers having different chemical analyses. PCS product is generally
guaranteed to contain no less than 60 percent K2O.

CANPOTEX LIMITED is an export company owned by all Saskatchewan potash
producers. Sales through Canpotex are generally allocated pro rata to each
producer on the basis of productive capacity. PCS provides 57.5 percent of
Canpotex product.


PHOSPHATE

PHOSPHORUS (P) is widely distributed in nature in combination with other
elements. It is most commonly found in phosphate ore, the only economical
source of phosphorus for production of phosphate fertilizers and phosphate
chemicals.

BPL, (bone phosphate of lime), is a standard reference for the phosphate
content of phosphate ore and phosphate rock.

P2O5 is phosphorus pentoxide, a term used to express phosphorus content of ore
or products. To convert P to P2O5, multiply by 2.29.

P2O5 tonne is a term used to provide a common measure of the phosphorus content
of fertilizers having different chemical analyses.

PHOSPHATE ROCK, the main source of phosphate fertilizers, is a form of calcium
phosphate, and also contains materials such as fluorine, magnesium and iron.
The phosphate rock is generally dissolved in a mixture of phosphoric and
sulphuric acid to produce a product stream containing phosphoric acid, and a
by-product stream containing primarily gypsum. The phosphoric acid product
stream is further processed to produce a wide range of phosphate fertilizers
and industrial products.

MGA, merchant grade phosphoric acid, is available in amber or green form, and
has NPK composition 0-54-0. It is primarily used to produce DAP.

DAP, diammonium phosphate, is the most commonly produced and widely traded
phosphate product. Its NPK composition is 18-46-0. It is produced by reacting
ammonia with phosphoric acid.

MAP, monoammonium phosphate, is a solid fertilizer with NPK composition
13-52-0. It is produced by reacting ammonia with phosphoric acid.

GTSP, granular triple superphosphate, is a solid fertilizer with NPK
composition 0-46-0. It is produced by reacting phosphate rock with phosphoric
acid.

SUPERPHOSPHORIC ACID, with NPK composition 0-70-0, is used to manufacture
liquid fertilizers and animal feed supplements. PCS LoMag is superphosphoric
acid, which is produced by evaporating MGA to remove water, and filtering to
remove impurities such as magnesium.

ANIMAL AND POULTRY FEED SUPPLEMENTS are an important use of phosphate. They are
solid and granular and have different compositions. These products are sold on
the basis of their phosphorus content.

PHOSCHEM is an association formed under the Webb-Pomerene Act for US exports of
phosphate fertilizer. PCS Sales is responsible for export sales of liquid
fertilizer products for all PhosChem members.


NITROGEN

NITROGEN (N) is a gas which makes up four-fifths of the atmosphere. It is an
essential nutrient for plant growth, and is present in chlorophyll and protein.
Some plants can obtain nitrogen from the atmosphere, but most obtain it from
soil solutions. It must be applied to the soil annually because its nutritional
value is consumed during each growing season.

N TONNE is a term used to provide a common measure of the nitrogen content of
fertilizers having differing chemical analyses.

AMMONIA is produced primarily from natural gas and atmospheric nitrogen as the
first step in the production of nitrogen fertilizers. It can also be directly
applied to soils. Anhydrous ammonia [NH3] is a gas with NPK composition 82-0-0.
Ammonia is condensed by pressure and cooling, and stored and transported in
this liquid form.

AQUA AMMONIA [NH4OH], ammonium hydroxide, is formed by blending anhydrous
ammonia in water. Commercial grades usually contain 20-25 percent nitrogen.

NITRIC ACID [HNO3], produced in varying strengths by reacting ammonia with
atmospheric oxygen, is used in the production of ammonium nitrate and as an
intermediate for industrial purposes.

AMMONIUM NITRATE [NH4NO3], with NPK composition 34-0-0, is water soluble and
used as a solid fertilizer, as a liquid in nitrogen solutions and in industrial
applications. It is produced by reacting ammonia with nitric acid. Half its
nitrogen is in the ammonium form, half in the nitrate form.

NITROGEN SOLUTIONS (UAN solutions) are produced by blending ammonium nitrate
solution with urea solution. They vary in nitrogen content (28-32 percent), and
are non-pressure solutions which are used principally for direct application on
soils and for manufacturing starter fertilizers.

UREA [CO(NH2)2], NPK composition 46-0-0, is the world's most commonly produced
and widely traded nitrogen product. It is manufactured by reacting ammonia with
carbon dioxide under high pressure. It is used as fertilizer and as a feedstock
for industrial purposes.

UAN EXPORT ASSOCIATION was formed under the Webb-Pomerene Act for exporting UAN
solutions.

<PAGE>   73







[GRAPH]


PCS  market capitalization has grown each year, and was $4.473 billion at the
end of 1997.

[LOGO]

POTASH CORPORATION OF SASKATCHEWAN INC.
Suite 500, 122 - 1st Avenue South Saskatoon Saskatchewan Canada S7K 7G3


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